Thursday, October 18, 2007

Do they even know the definition of a recession in order to be polled?

I came across this latest story by CNN about their polling of American's perspective of the state of the economy.

"WASHINGTON (CNN) — Nearly half of Americans feel the U.S. economy is in a recession, marked by a significant decline in economic activity, according to a survey released Thursday.

The poll by the CNN-Opinion Research Corporation found that while 46 percent of Americans hold that belief, 51 percent don't."

The article does define what constitutes a recession, but offers no explanation of whether or not such definition was read to those polled prior to asking their opinion.

InvestorWords.com offers the following defintion which is a bit easier to understand:

"A period of general economic decline; specifically, a decline in GDP for two or more consecutive quarters."

Interestingly, 2007 second quarter GDP growth was 3.8%, which is an increase over the first quarter growth of .6% (source). Obviously, with an increase between first and second quarters of 2007, we do not have a decline 'for two or more consecutive quarters.' In fact, according to this chart from the Bureau of Economic Analysis (did you even know it existed?), GDP has shown growth in every quarter since the third quarter of 2001 (based on chained 2000 dollars).

About two weeks ago, there was a interesting discussion on Swamp Bubbles about the economic figures that had just been released. The question I asked, which remains unanswered, was 'if these are bad numbers, what do they have to be to indicate a 'good' economy?' Most people judge an economy by their own personal perspectives often attributing the overall economy to be indicative of their personal situation. Some believe that they're doing okay, but based upon stories and news reports, think their neighbors are having a tough time, contributing to the subjective perspective of the economy as a whole.

And that discussion, combined with this poll, makes me wonder why we even bother to conduct such polls. It's clear that if 46% of those polled think we're in a recession, they do not understand how a recession is defined and are thus 'unqualified' to offer an opinion. If we polled economists, those who are supposed to be 'experts' or at least authoritative on the issue, would they say the same thing as the "public"?

So what is the purpose of such polls? And why is that no one asks qualifying questions before asking one's opinion and then extrapolating that into what 'America' thinks?

UPDATE: a rather succinct perspective on WHY 46% think it's a recession is available here.

20 comments:

Tim Higgins said...

Maggie,

It might be too much to ask, but perhaps the polsters out there could frame their questions a couple of different ways when polling each person. Such questioning could be used to determine whether the person being polled understands the questions being asked and help to take some of the statistical error out of the process. It seems like it might also negate some of the potential emotional response to questions asked "from a specific point of view".

Such an approach would provide a more scientific method to the process (like the double blind method). It might not produce the results that the polling groups are looking for however.

Maggie Thurber said...

That's a good point, Tim, and I'm sure that good pollsters will do just that...but open-ended questions are usually not in the pollsters arsenal.

In this case, I would have loved if the pollster asked "how is a recession defined?" and then, if the pollee answered correctly, they would go further in the poll.

I doubt any pollster does this, especially with this type of subject.

It's just that we ask people's opinion of war, foreign policy, and complicated federal bills that even legislators haven't read only to find out that they don't even know the name of the Vice President, Speaker of the House or, sometimes, their own senator or representative...but we're then expected to think that their opinion on the complicated issues is somehow relevant to the news or indicative of what all Americans think.... shameless!

Victoria Kamm said...

If we are looking for scientific answers then we have to stop asking random people. The pollsters should only ask economic experts.

If pollsters are looking for how people are experiencing the economy they should begin to define the geographic area. I promise you Atlanta is much more positive about the economy than Toledo. Or define whether the polled consider themselves investor class or wage earners. Usually a big difference there.

I agree with Tim that the results may not be what the pollsters want. That would be in the category of too darned bad. One of the downsides of the information revolution is everyone who wants to share his/her opinion can.

Maggie Thurber said...

yes, Victoria...lots of people like to share their opinions. However, it's how much credibility we give to those opinions that really matters. :)

Victoria Kamm said...

Agreed!

Tim Higgins said...

Unfortunately Maggie, pollsters are seeking opinions. We all know what they say about them, ... and how most smell.

Hooda Thunkit said...

The LAST thing that the group paying for the poll wants is non-dramatic results.

In this case, CNN got their desired results.

Any other results might have been a waste of CNN's money and air time.

Also, the results are a direct reflexion on our educational system's sucesses/failures.

-Sepp said...

People think there is a recession because the media is telling them there is. It's election time and the media is trying to steer public oppinion toward the democrats by stating oppinions about the economy rather than facts.
When you hear something often enough, is takes on it's own version of the truth and for some people it simply becomes "the truth".

Chris said...

Maggie, question for you. I understood the defintion of a recession to mean consecutive quarters of zero or negative GDP growth, same as you. But apparently there's another defintion according to the CNN article:

"The National Bureau of Economic Research defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP (Gross Domestic Product), real income, employment, industrial production and wholesale-retail sales."

Now since neither I nor you (I'm guessing) knew of this defintion, would this make us "unqualified" to answer the poll question?

Maggie Thurber said...

Chris - I was aware of this definition even before I read the CNN article and I mentioned it in my post:

"The article does define what constitutes a recession, but offers no explanation of whether or not such definition was read to those polled prior to asking their opinion."

And as our discussion on Toledo Talk shows, I'm not questioning if people have differing definitions, but whether or not they have ANY definition on which to base their opinion.

Given the CNN definition of 'significant declines' in real GDP, real income, employment, industrial production and wholesale-retail sales, anyone who's paid any attention whatsoever to the numbers (yes, those objective figures), would be hard-pressed to define our current economy as a 'recession.' And that's why I asked in my post whether or not this definition had been shared with the pollees.

The heart of the question - do they know how something is defined before asking if it exists - is critical.

Now, if you want to postulate that varying definitions may result in different answers, please do so, but I doubt that you'll find any 'recession' in today's economy no matter what accepted definition you use.

Chris said...

Maggie, how do you know these people are uninformed as to what a recession is? I'm assuming because you are using your definition to define a recession. If you use National Bureau of Economic Research's definition, then you could make an argument that we are in a recession.

Maggie Thurber said...

okay - so let's take the CNN definition as you request:

real GDP - already covered...increased every quarter since 2001...

real wages - from the Bureau of Labor Statistics:

"REAL EARNINGS IN SEPTEMBER 2007
Real average weekly earnings rose by 0.1 percent from August to September after seasonal adjustment, according to preliminary data released today by the Bureau of Labor Statistics of the U.S. Department of Labor. A 0.4 percent increase in average hourly earnings was offset by a 0.3 percent increase in the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Average weekly hours were unchanged. Data on average weekly earnings are collected from the payroll reports of private nonfarm establishments. Earnings of both full-time and part-time workers holding production or nonsupervisory jobs are included. Real average weekly earnings are calculated by adjusting earnings in current dollars for changes in the CPI-W.
Average weekly earnings rose by 4.1 percent, seasonally adjusted, from September 2006 to September 2007. After deflation by the CPI-W, average weekly earnings increased by 1.3 percent. Before adjustment for seasonal change and
inflation, average weekly earnings were $602.95 in September 2007, compared with $573.25 a year earlier."


employment - record low unemployment numbers. Since 2005 unemployment has been below 5.0% which most characterize as 'full' employment. (really don't want to debate such a characterization - just noting it for reference.)

industrial production - according to the Federal Reserve website stats: "Manufacturing production has expanded in each year since 2002, albeit at a somewhat slower rate than initially reported,..."

Additionally, their other chart shows annual production increases each year from 2002-2006 were .0, 1.1, 2.5 and 3.2 percent. Furthermore, total industrial production index from Sept. 06 to Sept. 07 increased 1.9%.

Wholesale-retail sales: According to Census Bureau figures, retail sales (ex. food service) has varied month to month, as you'd expect, but has increased from $257 million in January 2002 to $342 million in September 2007.

Also, according to Census data, "he U.S. Census Bureau announced today that August 2007 sales of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations and trading-day differences but not for price changes, were $360.9 billion, up 0.4 percent (+/-0.5%)* from the revised July level and were up 6.8 percent (+/-1.3%) from the August 2006 level. The July preliminary estimate was revised upward $0.5 billion or 0.1 percent. August sales of durable goods were up 0.9 percent (+/-0.8%) from last month and were up 4.4 percent (+/-2.0%) from a year ago. August sales of nondurable goods were down 0.1 percent (+/-0.7%)* from last month, but were up 9.1 percent (+/-2.0%) from last year. Sales of petroleum and petroleum products were down 6.1 percent from last month, while sales of farm product raw materials were up 9.5 percent."

So, all the indicators listed by CNN are up - not down and certainly not in "significant decline."

This means, that even by CNN's definition, the economy is NOT in a recession and the 46% of Americans who think it is either 1) don't know how to define a recession or 2) believe it's a recession when it really isn't.

Either way, they're wrong and I still wonder if, given the definition and the figures, the same people would answer similarly...

Chris said...

"real GDP - already covered...increased every quarter since 2001..."

That not part of the NBER defintion. A "significant decline" means just that. If GDP is 0.6 this month, and last month it was 2.8, that may be considered a significant decline even though there was growth both months.

It works the same way with real income, employment, industrial production and wholesale-retail sales. If these numbers are all on the positive side of growth, and yet they are down from previous months...and if this lasted "more than a few months", wouldn't that qualify as a recession by the NBER definition?

Maggie Thurber said...

Chris - did you read NBER's comment on recession or just take the single paragraph from CNN?

Here's what they say:

"The National Bureau's Business Cycle Dating Committee maintains a chronology of the U.S. business cycle. The chronology identifies the dates of peaks and troughs that frame economic recession or expansion. The period from a peak to a trough is a recession and the period from a trough to a peak is an expansion. According to the chronology, the most recent peak occurred in March 2001, ending a record-long expansion that began in 1991. The most recent trough occurred in November 2001, inaugurating an expansion.

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.

On November 26, 2001, the committee determined that the peak of economic activity had occurred in March of that year. For a discussion of the committee's reasoning and the underlying evidence, see http://www.nber.org/cycles/november2001. The March 2001 peak marked the end of the expansion that began in March 1991, an expansion that lasted exactly 10 years and was the longest in the NBER's chronology. On July 16, 2003, the committee determined that a trough in economic activity occurred in November 2001. The committee's announcement of the trough is at http://www.nber.org/cycles/july2003. The trough marks the end of the recession that began in March 2001. The 2001 recession thus lasted eight months, which is somewhat less than the average duration of recessions since World War II. The postwar average, excluding the 2001 recession, is eleven months.

In choosing the dates of business-cycle turning points, the committee follows standard procedures to assure continuity in the chronology. Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee views real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, the committee therefore places considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis of the U.S. Department of Commerce. The traditional role of the committee is to maintain a monthly chronology, however, and the BEA's real GDP estimates are only available quarterly. For this reason, the committee refers to a variety of monthly indicators to determine the months of peaks and troughs."


However, this quote is taken from their "latest business cycle memo" and it's dated 2003.

They also provide this:

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

A:: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. According to current data for 2001, the present recession falls into the general pattern, with three consecutive quarters of decline. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.


Wonder why CNN would use this organization when they haven't updated their "latest business cycle memo" since 2003??? What do you think?

Chris said...

Obviously I can't say for sure why they used them. But according to Wikipedia, "The NBER is the largest economics research organization in the United States. Sixteen of the 31 American winners of the Nobel Prize in Economics have been NBER associates, as well as three of the past Chairmen of the Council of Economic Advisers".
And they do have current material on their website, just not maybe the stuff you are looking for.

Joe C. said...

There is no way that what we are experiencing economically can be described as a recession - no matter what definition you want to use. These people are merely parroting what they have heard from some source that they consider "authoritative" (i.e. ABC, CBS, NBC, NYT, CNN, etc.) but have an agenda to make these sheeple believe that we are going to hell in a handbasket. Apparently they are doing a good job.

The problem is that these same people vote based on the same premise and are too lazy or unable to critically evaluate the facts. These people are ironically called Independents.

Maggie Thurber said...

Chris - no one's questioned the credentials of NBER, but if their most recent news about the economy is that it's up - and they haven't published anything to say it's down (or in a recession) even by their standards...what does that mean?

further, while they've got an impressive list of 'associates,' even they state: "Our procedure differs from the two-quarter rule..." acknowledging that the two quarter measure of GDP is a 'rule.'

So - I wonder why their last publication says we're in an upswing rather than a downswing...could it be because, even by their rules, it's not a recession?

Chris said...

Maggie, my last points (because I am out the door soon)--

I'd like to make it clear that I am not trying to argue if we are in a recession or not. However, it would appear that there is more than one way to look at the data (true?). Also, would it be entirely possible that the beginning signs of a recession would be felt (that is--declining economic indicators) BEFORE the actual quarterly (or monthly) numbers are reported? For instance, what if this same poll would have been taken during the first month of our last recession? Would the people in the poll have been correct, even though a recession had not been officially reported yet?

Maggie Thurber said...

Chris - you raise some good points ... points which demonstrate some of my overall concerns with polls - how they're conducted and what they mean. I'm also concerned that 'fear' about the economy can end up being a self-fulfilling prophecy, so to speak.

A lie repeated often enough can become a 'truth'...

Frank said...

This kind of question takes me back to my college days. Because I have a degree in communications and had a few classes on how to conduct a poll, if a company wants answers to go a specific way, you just simply gear your question(s) to be answered in the manner you want them to be answered. Also, how many people were polled? I mean, CNN could have asked 20 people if we were in a recession or not for all we know. And if they conducted their poll on line, that is not clean data since they can not control how many times a certain person could answer the question. Also, while Atlanta has some diversity, it does not make it "the United States". It would make their article more credible if they would have mentioned how they got their results. Of course, if President Bush has a failing grade, then so does Congress (which are true in both cases) when it comes to approval ratings.

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