The Peekaboo Recession — Is It or Isn’t It?
Kurt Brouwer May 19th, 2008
I have lived through a number of economic slowdowns, contractions and recessions and I have to say this is the oddest and hardest to read of any I have witnessed. We have a slowing economy that many economists have labeled (or is it libeled?) a recession. And, clearly there are numerous signs of recession all around us.
Four straight months of job losses in payroll employment. Economic growth that — at 0.6% — is close to the stall level. Higher unemployment. Tumbling home prices and a sharp increase in home mortgage defaults.
Yet…
If economic demand is really falling, why are commodity prices — oil, copper, food — going up? Normally, a weak economy would demand less of those products and prices would fall. For example, I remember in 1982 the price of oil fell and drilling activity around the world fell with it. Yet now, drilling activity is high and oil prices are high too. What gives?
And…
On the other hand, we see positive indicators of economic health. Though unemployment has gone up a bit, at 5% it is still low by historical standards. And, interest rates are low. Exports are booming and many economic sectors are doing well. And, leading economic indicators have gone up for two months in a row. From Bloomberg, here’s the latest example of economic indicators that are confusing, contrary and ultimately contradictory [emphasis added]:
U.S. Economy: Leading Economic Indicator Index Rose In April (Bloomberg, May 19, 2008, Bob Willis)
The index of leading U.S. economic indicators rose in April for a second month, the first back-to- back gain since October 2006, signaling that the current slowdown will be short-lived.
The Conference Board’s gauge increased 0.1 percent, better than forecast and matching the gain in March, the New York-based research group said today. The measure points to the direction of the economy over the next three to six months.
Stocks and the dollar rallied after the figure spurred speculation that tax rebates and the Federal Reserve’s interest- rate cuts will aid a recovery in the second half. Economists estimate the economy will expand just 0.1 percent this quarter as consumers rein in spending in the wake of falling house prices and a surge in fuel costs.
“The message on the economy is that activity is soft but not moving down sharply,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York, who accurately forecast the index’s gain. “The economy is muddling along.”
So far, so good. The economy is muddling along. Yet, there is…
…Growing Pessimism
The Reuters/University of Michigan sentiment index decreased in April to a 26-year low, while its expectations gauge fell to the lowest level since 1990. The measure of prospects dropped even more this month, sending sentiment to a 28-year low, the group reported last week.
“The generally poor economic outlook, including well-known housing pressures, rising food and fuel prices and a more negative employment picture eroded consumer confidence and impacted discretionary purchases for the home,” Robert A. Niblock, chief executive officer at Lowe’s Cos., the world’s second-largest home-improvement retailer, said today in a statement.
…While economists forecast growth will pick up later this year, the rebound may not be vigorous.
The economy will grow at a 1.2 percent rate for all of 2008, compared with a 2.2 percent pace in 2007, according to the median estimate of economists surveyed this month.
…Harvard University economist Martin Feldstein, a member of the committee that determines when contractions begin and end, said in a Bloomberg Television interview May 6 that the economy was “sliding into a recession.”
First, the article opines that economists expect a positive rate of economic growth for 2008 and positive economic growth is the opposite of a recession. Yet, distinguished economist Martin Feldstein is quoted as thinking we’re ’sliding’ into a recession. That’s clear as mud isn’t it? Yet wait, there’s more.
Here is what the same distinguished economist said in an interview on March 14th and covered (see US Faces Severe Recession, Feldstein Says) in Fundmasteryblog [additional emphasis added]:
Martin Feldstein is a distinguished economist who has studied business cycles for many years. This statement indicates his deep concern over the credit crunch that is the primary cause of our current economic slowdown [emphasis added].
US Faces Severe Recession, Feldstein Says (CNBC / Reuters, March 14, 2008)
The United States has entered a recession that could be “substantially more severe” than recent ones, former National Bureau of Economic Research President Martin Feldstein said
“The situation is very bad, the situation is getting worse, and the risks are that it could get very bad,” Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida…
Question for Mr. Feldstein. If we entered a recession in March or earlier, how can we be sliding into one now?
So, my point is that you need to exercise caution when you read a stark pronouncement about the economy or see or hear something in the media. Bear in mind that this is a confusing time economically and even brilliant economists such as Martin Feldstein appear confused.
In my view, this is beginning to appear more and more like a financial panic — triggered by the subprime lending mess and falling home prices — rather than a classic economic recession (see Paul Krugman — The Worst May Be Over and Is It A Recession Yet?).
Bookmark Fundmasteryblog: Here’s the link
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I’ve said it before and it deserves repeating, economists are notorious for being horrible forecasters (including Marty Feldstein). Yet, there’s no doubt (as you correctly pointed out, Kurt) that the often contradictory economic data we’ve seen recently is confusing. My hunch is that this may be only the beginning of a protracted downturn and eventually all, or many, of the numbers will point in the same direction. Give it some time.
As for the LEI, here’s what the Conference Board had to say:
“After declining steadily since the middle of 2007, the leading index appears to have stabilized lately, increasing slightly in March and April. Meanwhile, the coincident index declined slightly since October 2007 and the weaknesses among its components have been widespread in recent months. During the first quarter, real GDP expanded at a 0.6 percent annual rate, the same growth rate that prevailed in the fourth quarter of 2007. The current behavior of the composite indexes so far still suggests that economic activity is likely to remain weak in the near term.”
http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1
Despite its name, I don’t believe the LEI has historically been a very good predictor of anything either.
I agree that this is a very different downturn to those experienced in the 80s/90s or indeed after the tech bust, which were classic inventory/business cycle led recessions; it’s probably more like the oil shock/banking crisis of the early 70’s and therefore likely to be a protracted affair, with the ecomony dipping in and out of quarterly recession over a couple of years at least; in the end we may need a painful Volcker style squeeze on inflation to restore the economy to equilibrium.
what about ECRI? they say mild recession, and they’re track record is pretty good.