More on the Recession Watch.--

Last Friday, I posted the results of some data analysis on the question whether we are entering a recession. It turns out that others noticed some of the same patterns as I did.

Here is what Bob Willis at Bloomberg wrote (tip to VC commenter Mark Field):

The U.S. economy may be on the verge of — or already in — a recession, based on the increase in 2007's unemployment rate, economists said.

The jobless rate rose to 5 percent in December, the highest in two years. The figure was 0.6 percentage point higher than March's 4.4 percent, which was the lowest reading of the expansion that began at the end of 2001.

"Since 1949 the unemployment rate has never risen by this magnitude without the economy being in recession," John Ryding, chief U.S. economist at Bear Stearns Cos. in New York, said in a note to clients. "We now put ourselves on recession watch."

Before the start of the last contraction in March 2001, the unemployment rate rose just 0.4 percentage point, according to Labor Department figures. The rate barely rose at all ahead of the 1990-91 downturn, one reason why economists consider it a so-called lagging signal.

The National Bureau of Economic Research, which determines when recessions begin and end, defines them as a "significant" decrease in activity over a sustained period of time. The declines would be visible in gross domestic product, payrolls, production, sales and incomes.

The increase in the jobless rate "is disturbing indeed," Victor Zarnowitz, 88, a senior fellow at the New York-based Conference Board and a member of the NBER group that dates contractions, said in an interview. "A lot of people would rule out that a recession is pending. I would not. It's too early to say and it's perhaps not very likely that it will come, but I would not rule it out." . . .

Consumer Spending

Another key area that has yet to issue any alarms is consumer spending, which accounts for more than two thirds of the economy. Spending figures in November were stronger than forecast even as gasoline hovered around $3 a gallon and property values slumped.

That leaves the onus on December retail sales figures, due from the Commerce Department on Jan. 15, to determine whether the American consumer will indeed falter.

"We are spooked by this week's data and very open to a much weaker economic scenario," Stephen Stanley, chief U.S. economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note. A "collapse" in consumer spending last month would prompt him "to carve up our forecasts for 2008 and start over with much weaker growth" estimates, he said. . . .

"It's not a good situation," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "It is certainly true that every time the unemployment rate has done what it did today, we are in a recession."

Still, "I don't want to forecast a recession," he said, "I would prefer for the National Bureau of Economic Research to call it a recession."

Note that an unemployment jump is usually a lagging or coincident indicator of a recession. That raises the nontrivial possibility that we entered an economic downturn in December or will enter one in January or February.

Related Posts (on one page):

  1. More on the Recession Watch.--
  2. Has a recession already started?--
pmorem (mail):
I stopped normal employment a year ago to work on a self-employed project. I may need to return to work. The ease of my doing so depends directly on the perception of the economy.

I'm becoming seriously annoyed at what I see as people trying to jaw-bone down the economy.

You're killing me.
1.7.2008 2:37pm
James Lindgren (mail):

I not trying to jawbone the economy down, and I doubt that my comments would have any effect anyway.

Since early August I have been worried by the Fed's cautious response to the credit crunch.

This looks a bit like 1990-92 to me, when the Fed was slow to act and unemployment peaked in the summer of 1992. By the time of the 1992 election, the economy was expanding at a fast clip, but the recovery was too late to help GHW Bush.

Jim Lindgren
1.7.2008 2:46pm
G-Man (mail):
Well, if we're not in one, never fear, we'll talk ourselves into one.
1.7.2008 2:51pm
JosephSlater (mail):
Well I, for one, had been planning to open up a big new factory, employing lots of poeple at good wages and adding valuable goods to the economy which likely would have had a variety of positive multiplier effects in related industries and communities. But now that I've read JL's post, I've decided against it.
1.7.2008 3:02pm
James Lindgren (mail):
Joseph Slater:

Too bad about your canceling your factory plans.

And I just got an email from Warren Buffett saying that because he read my post he's pulling most of his investments out of the stock market.

Who knew . . . ?

Jim Lindgren
1.7.2008 3:07pm
pmorem (mail):
I not trying to jawbone the economy down

I believe your statement of intent. Don't underestimate the reach of your voice, though. Particularly as it touches a segment that is not generally inclined towards believing a similar message coming from MSM.

The '92 election particularly stands as precedent in this. Talking about the bad shape of the economy played direct role in the election. It appears that some partisans (particularly within the Clinton camp) are attempting to repeat that.
1.7.2008 3:09pm
Houston Lawyer:
Is it even definitionally possible to have a recession with 5.0% unemployment. Back when I was in school, this would have been considered Nirvana.
1.7.2008 3:25pm
pmorem (mail):
Warren Buffett's assets are about 0.05% of US holdings. Individual decisions really don't matter that much. That's part of the beauty of the free market.

However, most market decisions are at least slightly affected by economic outlook. A shift in bias there actually does matter.
1.7.2008 3:25pm
Adam J:

Yeah, how incredibly unfair to of partisans to use the bad shape of the economy to get elected. After all, voters shouldn't be making decisions on who to elect based on how the economy has done...
1.7.2008 3:30pm

Warren Buffett's assets are about 0.05% of US holdings.

I, for one, never thought of it like this. When framed this way, I am actually surprised how large a share of the US stock market Buffett owns/owned. I would have thought that there were more zeros in front of that five.

That's the second time a Buffett related factoid surpised me in the last week or so. Recently, an article on MSN or Yahoo! said that there were around thirty families in the Omaha area that have $100 million or more in assets due to their Birkshire Hathaway holdings. That's gotta be the highest concentration of the super-wealthy in the US, right? How does that compare to say, Manhattan?
1.7.2008 3:38pm
pmorem (mail):
I didn't say it was unfair. US politics is a blood sport, and I'm ok with that.

The phrase I used was "jaw-bone". Observing is one thing. Altering is another. I object to the "altering" aspect.
1.7.2008 3:46pm

The '92 election particularly stands as precedent in this. Talking about the bad shape of the economy played direct role in the election.

I often watched both the NBC and ABC newscasts back then. It was comical. Zero positive on the economy pre-November election. After it was over, by mid-November good economic news was all over. No way the economy changed that fast, but reporting priorities obviously did.
1.7.2008 3:50pm
"Is it even definitionally possible to have a recession with 5.0% unemployment"

With a Repub in office, yes. If Gore hadn't been denied the Presidency in a coup, then the economy would be described glowingly (based on the exact same numbers). I saw this at work in the MSM in 2004.
1.7.2008 3:53pm
Adam J:
pmorem- okay, sorry for the criticism then. There's obviously a fine line between altering and observing when it comes to the economy, since observations by influential people can actually quicken the realization of a recession as companies start tightening their purse strings in reaction to the observations. Still, insisting these people keep from making their observations will only delay the recession, and probably prolong it as well as companies and individuals suffer from making poor investments they wouldn't have made had they known the economy's outlook. If you suspect someone of "jaw-boning", I suggest you provide justification for why their observation is wrong, rather then make generic statements.
1.7.2008 4:04pm
Adam J:
Not to say U think that we're currently in a recession, I of course am quite uninformed!
1.7.2008 4:05pm
Adam J:
oops, replace "U think" with "I think"
1.7.2008 4:06pm
Thales (mail) (www):
"Is it even definitionally possible to have a recession with 5.0% unemployment. Back when I was in school, this would have been considered Nirvana."

Yes, or if not, it should be, just as standard inflation measures should account for rather than exclude food and energy prices. BLS Unemployment figures, remember, cut out people who have stopped searching for work (i.e. because they're unemployable at reasonable wages) after a certain point, so their use fails to capture the whole picture. Moreover, employment rates ought to also be evaluated in the context of (rising or falling) real wages and (improvements or declines) in real standards of living. Full employment means little as an indicator of economic health if a good chunk of the employed can't feed, clothe or otherwise care for themselves and their families in the way they were able to historically.
1.7.2008 4:10pm
pmorem (mail):
Paul Krugman is an easy example.

Clinton economic adviser Roger Altman is a better example.
1.7.2008 4:17pm
Andy Freeman (mail):
> there were around thirty families in the Omaha area that have $100 million or more in assets due to their Birkshire Hathaway holdings. That's gotta be the highest concentration of the super-wealthy in the US, right? How does that compare to say, Manhattan?

That probably doesn't beat Atherton, CA, let alone the greater Palo Alto area.
1.7.2008 4:24pm
Bpbatista (mail):
Isn't the text book definition of a recession 2 consecutive quarters of negative growth? If so, since the Q3 2007 was positive and -- even assuming Q4 2007 was negative -- we have not yet completed Q1 of 2008, how can we be in a recession today? We will not know if we are in a recession today until April 2008.
1.7.2008 4:45pm
blcjr (mail):
Bpbatista, that is indeed the "textbook" definition of a recession, but "official" recessions are so designated by the NBER who do not limit themselves to calendar quarters. So at some time in the future, they might well decide that a recession began in December of 2007, even though when Oct/Nov are factored into the 4th quarter, there was overall positive growth for the 4th quarter.
1.7.2008 4:57pm
SenatorX (mail):
First rule of Bad Economy : Don't talk about Bad Economy!

Looking at lagging indicators is annoying. They are used so that we can go straight from "no problem" to "the problem is past".
1.7.2008 5:03pm
James Lindgren (mail):
There are many different measures of a recession used by economists. The NBER is the most commonly used, but the two consecutive quarters of GDP drop is common as well.

The advantages of the 2-quarter GDP rule is not that it's a particularly good measure, but rather that it's a clear, objective one and thus less manipulable.

The advantages of the NBER approach are that (1) it can catch--and properly date--recessions that start or end in the middle of a quarter, (2) it looks at more kinds of data, (3) it can catch oddly patterned recessions (such as 2000-2001 when there were 3 down GDP quarters within a 5 quarter stretch), and (4) it matches the prevailing subjective impressions of which downturns were recessions. The NBER actually has to meet and decide--after the fact--when a recession started and ended.

What this discussion implies is that while a recession is a real thing (like happiness or anger or psychosis), it is a "latent" construct or variable that can only be measured imperfectly by indicators.
1.7.2008 5:48pm
pmorem (mail):
What this discussion implies is that while a recession is a real thing (like happiness or anger or psychosis), it is a "latent" construct or variable that can only be measured imperfectly by indicators.

I agree with that. I would put "the economy" in the same category as "nation" in that regard. While there are real elements that affect and feed back into the system, the system itself is fundamentally made up of people. It is built up with social constructs which we choose to believe in.

Talking up or down some construct has an impact on the overall "health" of that construct.
1.7.2008 6:04pm
"Isn't the text book definition of a recession 2 consecutive quarters of negative growth?"

Well, if it doesn't happen under Bush, then we just need to redefine the term so it can be pinned on him.
1.7.2008 6:18pm

A different set of data concerns me. While the number of delinquencies on mortgages has increased recently, the number of delinquencies on credit cards has FALLEN. I interpret this data to mean that people are living on their credit cards and paying them so that their daily purchases will go through. This is a very, very bad sign.
1.7.2008 6:28pm
theArtman (mail):
I am no economist, but isn't it true that this time of year retailers lay off a lot of temps? Also, the fact is that any self respecting conglomerate is packing it in for the prospect of a lefty tax increasing, social spending group to invade Washington. After all one is wise to invest when taxes are low. The articles about Hilliarity, and Edwardsairity, and an O-Bombing run bent on increasing entitlements, ( not to mention the state of the Congress in the last year-shaky is the word there), is enough to cause any and all business to not plan on any expansion in the near future and to even pull in their horns until they see what develops in this the topsy-turviest race for president I can ever recall,( and just whose coat-tails do what when). the Artman
1.7.2008 7:07pm
First rule of Bad Economy : Don't talk about Bad Economy!
If this is a bad economy, all I can say is, Give Me More!!

Some folks would rather sell their mothers into a Turkish whorehouse than admit that the economy is doing pretty damned good under GWB.
1.7.2008 7:48pm
James Lindgren (mail):

The data are seasonally adjusted, as well as adjusted for other things, like the birth-death ratio. The latter adjustment "added" jobs to the observed counts.
1.7.2008 7:49pm
James Lindgren (mail):

I think that the economy under GW Bush has been doing very well. Now IMO because of (different) mistakes by the last 2 Federal Reserve Chairs, I think we are probably going into a recession. As my first post noted, an impending recession is NOT the consensus of experts who know a lot more than I do.

Also, even if the economy peaked in November and dropped a tad in December, that would still make December's GDP level one of the 3 or 4 highest months in US history.
1.7.2008 7:56pm
ATM (mail):
I would note that a drop in employment may not mean much in terms of economic growth if a large portion of those who lose their job are not very productive and if those who remain continue to increase their significantly productivity.

Remember, the recover was called a "jobless" recovery for a long time due to anemic job growth in the face of increasing economic output. Though some of that was due to lack of accounting for self employed persons, a significant part of that was attributed to increased productivity. And example cited was those automated check-in machines at the ticketing counters in airports that were replacing gate agents. In recent years, I have noted an increased penetration of self checkout aisles in grocery stores, which often replace two regular check out lines with two cashiers and maybe one or two baggers with four self check out machines and one attendant/cashier. We also seeing a shift from manned toll booths to electronic RF toll metering.

I think the weakness of the dollar complicates the picture significantly. Clearly it increases the cost of many commodities and many imported consumer items, but it really has given a lot US based operations pricing power in the international market place. The cost has been that US per capita GDP in absolute currency terms has increased slower than European per capita GDP, but still remains significant above in absolute terms even when the poor Eastern European countries are excluded. And in purchasing power terms, US per capita GDP is much, much higher.
1.7.2008 8:54pm
SenatorX (mail):
Not everyone that is interesting in our economic problems is a democratic hack. I am interested though in the "gimme more" concept Smokey. What exactly are you loving?
1.7.2008 9:02pm
SenatorX (mail):
James to me it's not even just the mistakes made by the federal reserve(which they have already admitted), it's also the moral hazard of the GSE's that allowed the securitizing boom. One thing to Bush's credit is that up to now he has resisted giving Fannie and Freddie more power (though their books are growing anyway). He has said he prefers to go through the FHA. Unfortunately the Paulson speech today shows he may be giving in.
1.7.2008 9:46pm
Mark Field (mail):
According to this report, Merrill Lynch says we're already in a recession.
1.8.2008 12:03pm
What exactly are you loving?
I'll answer this way: Following my discharge [Jan. 1970], I was job hunting daily. It took me over six months to find a job - $3/hr, no benefits. Unemployment continued to increase over the next decade, until it approached 10% [remember stagflation]? I bought a house on the GI Bill in 1981 - 17% interest rate [the FHA rate was over 18%].

Today, unemployment is around 4.5 - 5%. Homebuyers' interest rates are under 6%. Anyone seriously interested in employment can find a job - with benefits.

Lots of people don't know when they have it good. And those who do know we have it good, but are filled with hatred for the current president, are trying to tell the rest of us that things are really bad. They're being mendacious.

Gimme more of this economy!!
1.8.2008 1:11pm
sovereignjohn (mail) (www):
before the downturn of 1929 and again in 1932 when the depression really hit economist were clueless or perhaps knew and didn't tell the general public. If you work for your survival you won't hear the reality of anything, especially the real condition of the economy.
1.9.2008 1:37pm