Posts filed under “Cycles”
Two interesting things happened last November 24. One was pretty well publicized, the other not so much:
- We got a downward revision of U.S. GDP for the third quarter, from an “advance” 3.5% to 2.8% (it was ultimately determined to be 2.2%) — in any event, it was the first positive print we’d seen in some time.
- The National Bureau of Economic Research’s Business Cycle Dating Committee (BCDC) — the folks who date recessions — posted, with no fanfare whatsoever, a very interesting (and undated) statement at their website (the NBER provided me with the date upon a quick inquiry).
As I read the second paragraph of their brief statement, I’m left wondering if the NBER is angling for the (very real, IMO) possibility of a double-dip — which in this case they might well consider one long recession, notwithstanding a “short period of expansion.” Read for yourself (emphasis mine):
In both recessions and expansions, brief reversals in economic activity may occur—a recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth. The Committee applies its judgment based on the above definitions of recessions and expansions and has no fixed rule to determine whether a contraction is only a short interruption of an expansion, or an expansion is only a short interruption of a contraction. The most recent example of such a judgment that was less than obvious was in 1980-1982, when the Committee determined that the contraction that began in 1981 was not a continuation of the one that began in 1980, but rather a separate full recession.
The note concludes:
The Committee does not have a fixed definition of economic activity. It examines and compares the behavior of various measures of broad activity: real GDP measured on the product and income sides, economy-wide employment, and real income. The Committee also may consider indicators that do not cover the entire economy, such as real sales and the Federal Reserve’s index of industrial production (IP). The Committee’s use of these indicators in conjunction with the broad measures recognizes the issue of double-counting of sectors included in both those indicators and the broad measures. Still, a well-defined peak or trough in real sales or IP might help to determine the overall peak or trough dates, particularly if the economy-wide indicators are in conflict or do not have well-defined peaks or troughs.
Now, when I look at the St. Louis Fed’s “Tracking the Recession” page, I don’t see much that seems particularly “well-defined,” except for Industrial Production (IP). And many other indicators — first, second and third tier — are clearly “in conflict.” At the St. Louis Fed’s page, other than IP, I see three flatlines for Employment, Real Retail Sales and Real Income.
I’d note that the NBER does not care where growth comes from. Several weeks before their November statement, I queried some members of the BCDC as to how they would view stimulus-induced growth. This is how one replied (speaking only for himself, and including the classic economist’s “on the one hand, on the other”):
On the one hand, we feel no need to strip out the effect of government spending to see what the private sector is doing. G is just as much a part of GDP as C+I+X-M.
On the other hand, there is always the danger that the economy might dip back down again in 2010 when the fiscal stimulus fades out, in which case that would probably count as part of the same recession as 2007-09. So in that sense, yes, the expansion has to “take root” organically.
I’d also note this comment from BCDC member professor Martin Feldstein on December 17, 2009:
“The recession isn’t over,” Martin Feldstein, former president of the Cambridge, Massachusetts-based NBER and a member of its Business Cycle Dating Committee, said in an interview with Bloomberg Radio today. “2010 is going to be a very weak year,” Feldstein also said, as American consumers limit spending and home prices may resume their slide.
I’m on record as saying the BCDC will take its sweet time with this one, and their November 2009 statement, in addition to Feldstein’s, gives me no reason to change that point of view. Their announcement — or lack thereof — will likely be a factor in the November mid-term elections (one wonders if there were any political considerations associated with their post-election, December 2008 announcement of a recession having begun one year prior).
Edward Harrison here. This is an updated version of a post I wrote about two-and-a-half months ago over at Credit Writedowns. When I wrote it, I had been looking for bullish data points as counterfactuals to my bearish long-term outlook. I found some, but not nearly enough.
Early this year, I wrote a post “We are in depression”, which called the ongoing downturn a depression with a small ‘d.’ I was optimistic that policymakers could engineer a fake recovery predicated on stimulus and asset price reflation – and this was bullish for financial shares if not the broader stock market. But, we are witnessing temporary salves for a deeper structural problem.
So my goal was to find data which disproved my original thesis. But, I came away more convinced that we are in a tenuous cyclical upturn. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I pull together a number of threads from previous posts, so it is pretty long. I have shortened it in order to pull all of the ideas into one post. So, please read the linked posts for background as I left out a lot of the detail in order to create this narrative.
Let’s start here then with the crux of the issue: debt.
Deep recession rooted in structural issues
Back in my first post at Credit Writedowns in March 2008, I said that the U.S. was already in a recession, the only question being how deep and how long. The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.
I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the 1970s lost decade trauma in the U.S. and the U.K.. The 70s was a low growth, high inflation ride that generated poor market returns. The U.K. became the sick man of Europe and labor strife brought the economy to its knees. For the U.S., we saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.
In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labeled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).
By now, you have heard the term ‘Minsky moment.’ It was coined by Pimco’s Paul McCulley to describe events in Russia that precipitated the LTCM crisis. McCulley was referring to economist Hyman Minsky’s concept that long periods of stability cause people to take on ever more debt and ever more risk, leading to a gigantic…Read More
Floyd Norris channels Dickens to discuss the Worst of Times (employment wise): “The overall unemployment rate, which reached 10.2% on a seasonally adjusted basis last month, remains below the post-World War II peak of 10.8 percent, reached in late 1982. But the proportion of workers who have been out of work for a long time…Read More
Fascinating New Yorker piece on Martin Armstrong, a technical analysts/cycle forecaster I have been reading about for some time — his is a long sordid tale, but the bottom line is he is in jail. Its his cycle work that is so fascinating. Nick Paumgarten looks at his attempts to predict the financial markets using…Read More
Econo-Smackdown! Here’s an interesting difference of opinion: PIMCO‘s Mohamed El-Erian believes a return to the old ways of thinking threatens recovery. ECRI‘s Lakshman Achuthan disagrees, stating the U.S. economic recovery is ‘far from fragile.’ • Return of the old ways of thinking threatens recovery • U.S. economic recovery is ‘far from fragile’-ECRI Gotta love it…Read More
Former Morgan Stanley Analyst Andy Xie explains why this will not be a regular cyclical recovery following the credit collapse and great Recession:
“In a normal economic cycle, an inventory-led recovery would be followed by corporate capital expenditure, leading to employment expansion. Rising employment leads to consumption growth, which expands profitability and more capex. Why won’t it work this time? The reason, as I have argued before, is that a big bubble distorted the global economic structure. Re-matching supply and demand will take a long time.
The process is called Schumpeterian creative destruction. Keynesian thinking ignores structural imbalance and focuses only on aggregate demand. In normal situations, Keynesian thinking is fine. However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works.
Many policymakers actually don’t think along the line of Keynes versus Schumpeter. They think in terms of creating another bubble to fight the recessionary impact of a bubble burst. This type of thinking is especially popular in China and on Wall Street. Central banks around the world, although they haven’t done so deliberately, have created another liquidity bubble. It manifested itself first in surging commodity prices, next in stock markets, and lately in some property markets. Will this strategy succeed? I don’t think so.”
Full article after the jump
Andy Xie: New Bubble Threatens a V-Shaped Rebound
“There is a real danger this is going to be a double dip and that after six months or so we’ll have some more bad news. We could slide down again in the fourth quarter.” -Martin Feldstein > Normally, I don’t get too excited when some economist or another makes these proclamations. However, Feldstein is…Read More
Art Cashin has been on a floor broker on the NYSE for UBS for as long as I can remember. His daily missives on CNBC are the highlight of their broadcast day. “Back On The Cycle – David Rosenberg, formerly chief economist at Merrill Lynch and now at Gluskin Sheff was a guest host on…Read More