“New Deal democrat” is the nom de blog for a professional who is not employed in finance or investment, but who has been an investor for nearly 20 years. NDD publishes regularly at The Bonddad Blog


As Barry Ritholtz pointed out at the time, exactly one year ago today a very specific intellectual challenge was made. It started with Mish strongly challenging ECRI’s record of predicting recessions.

Subsequently, Prof. Paul Krugman wrote:

Michael Shedlock has an awesome takedown of ECRI’s claim that its indicators (a) have successfully predicted turning points in the past (b) point to a sold recovery now. I’d add that this is a really, really bad time to be relying on conventional indicators.

Why? Basically, because in a zero-interest rate world — the three-month rate was .066% last I looked — especially one that’s suffered from a collapse of the shadow banking system, conventional indicators don’t mean what they usually mean. Increases in the monetary base aren’t especially expansionary. The yield curve more or less has to slope up, even if no recovery is expected. And so on.

So historical correlations, to the extent that they exist — and as Shedlock points out, ECRI is claiming a much better record than it really has — can’t be counted on to prevail. There’s really no alternative to making fundamental analyses of the macro situation.

Lakshman Achuthan of ECRI responded with a very specific challenge:

we fully expect the current economic recovery to prove to be stronger than the last two, at least through mid-2010….

While we don’t necessarily expect our clarifications to change your views about the near-term course of the business cycle, we would hope that if, a year from now, ECRI’s leading indexes are proven to have been correct, you would publicly acknowledge the same. After all, the proof is in the pudding.

It is exactly one year later today. So, was “the current economic recovery stronger than the last two, at least through mid-2010?” The data is in, and we have an answer.

To judge the issue, I am relying on the indicators chosen by the NBER to gauge the end of recessions: GDP, Industrial Production, Real retail sales, Nonfarm payrolls, Aggregate hours worked, and Real income. As of June 30 of this year, here is how they stacked up against the last two recoveries:

Here is real GDP:

This is no contest. Judging based on 12 months from the end of the 3 recessions as decided by the NBER, the year between June 30, 2009 and June 30, 2010 showed the strongest GDP growth.

There is also no contest when it comes to the first 12 months after the recession bottom as to Industrial Production:

The same is true of real retail sales:

Perhaps surprisingly, aggregate hours worked also improved more strongly in the twelve months between June 30, 2009 and June 30, 2010 in comparison with the last two recoveries:

But the biggest surprise of all is the one measured by nonfarm payrolls. In the graph below, the blue line measures payrolls growth for a period of 6 months from the lowest post-recession reading of the “jobless” recoveries (most recently, December 2009 through June 2010). The red line, by contrast, measures job growth (or not) in the twelve months since the official NBER bottom:

I expected the two different modes of measurement to yield very different results. Instead, either way, the present recovery through June 30, 2010 has been stronger for jobs than either of the last two.

Finally, here is real income:

Although it is difficult to tell from the graph, real income was stronger in the first year of the recovery from the 1990 recession than at present.

That makes the final score: ECRI 5, Krugman 1.
So, will Prof. Krugman publicly acknowledge, as requested by ECRI last year, that their forecast was correct, and that contrary to his assertion then, “There[ ] really [is an] alternative to making fundamental analyses of the macro situation?”

Category: Data Analysis, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “One Year later: Mish vs. ECRI vs. Krugman”

  1. The Flaw of Averages: Why We Underestimate Risk in the Face of Uncertainty


  2. 4horsemen says:

    Wow. I have to say I’m surprised. Have I really been that influenced by the media to believe that the situation now was so much worse?

    I have a few questions then: Why is the Fed engaging in more QE and making more cautious commentary about the recovery? Did the Fed engage in QE in the previous periods? Is the destroyed currency ‘benefit’ of QE the goal of Bernanke?

  3. WaltFrench says:

    @4horsemen — No, this post is precise about the specific ECRI claims, whereas the PK quote above merely says that ECRI’s track record is spottier than they’d have you believe, and that many conventional indicators are less helpful than in the past.

    Not having access to ECRI’s track record, I’d say the score was ECRI 1 (the recovery, from the bottom was stronger than its predecessors on the measures shown) and PK 1.x, where I can only score his claim that e.g., a zero interest rate does NOT show the incredible easy credit that it would have in say, early 2008.

    The challenge for the economy, and policy, is to recover back to our potential. The traditional approach of projecting from the pre-recession peak seems over-generous in giving full credit to borrowing-induced “GDP” that was unsustainable. But still, we are waaaay below our potential as measured by capacity utilization and unemployment levels. On these measures, the suggestion of ECRI gets 0 and PK 1.

  4. junkndump says:

    @ WaltFrench — Hold on, let’s not get sloppy here.

    1. ECRI offered no suggestion on policy, so that straw man doesn’t stand up.

    2. “ECRI’s record is spotty” has been refuted on TBP already, many times.

    3. PK just assumed (as economists often do) that ECRI was a conventional forecaster, which ECRI refuted on PK’s blog and TBP.

    What remains is the fact that ECRI called the end of the recession AND that the early stage of the recovery would be stronger than the last two recoveries. That is as categorical a forecast as I’ve ever heard, and one that PK went out of his way to trash. On the specifics of that forecast ECRI was right and PK was wrong.

    Bottom line, whether you agree with PK’s policy advice or not depends largely on ideology, but don’t let your ideology blind you into thinking PK is as good a forecaster as ECRI.

  5. the bankster says:

    By the logic of this contest, the strongest recovery of all might be GDP growth of 100% following a GDP drop of 99%. Sure we’d still be 98% below pre-recession levels, but what a recovery it’d be. In the real world, 4horsemen, the level is just as important as the rate of change, especially when we are so far away from the old equilibrium. The true measure of a recovery is how long it takes to return us to prior peaks, adjusted of course for changes in productivity and population.

  6. plop says:

    we ain’t operating at potential gdp; and potential gdp is lower than it was before the recession started

  7. vnbellam says:

    One of the definiton of “Recovery” is ” A return to a normal conditions “. I have stocks which fell by 80% during the market crash of 2008. Even though they have gone up by 100% ( I can not use the word recoverd) fron their low, they still trade at 60% lower than their peek. I wil not consider them as recoverd. So the graphs in the above articel do not fully represent the recovery picture.


    BR: You seem to be confusing the concept o economic recovery with individual stock recovery.

    The fallacy of this approach can be demonstrated by reminding you of all of the dot com stocks that collapsed in 2000-03, and never came back, despite the economic recovery and market rebound of 2003-07

  8. crack says:

    What bankster said. What’s the rss address I can use so I don’t get worthless stuff like this in my RSS feed?

  9. baychev says:

    the old adage goes: when you are cheating, you are cheating yourself.

    to what use are indicators that show an immaculate recovery that still requires at this point unprecedented interventions?