Monday, October 3, 2011
ECRI Calls For New Recession
This is a really good interview. You should watch the whole thing. Here are the main points
1.) Yes, there was an expansion. You don't create over 1 million jobs in a recession. However, total establishment jobs are still about 6.8 million below previous levels.
2.) Initial claims have yet to move below 400,000 in a big way. This indicates the labor market is in very weak shape.
3.) Exports were a primary driver of the last expansion. Because Europe and Asia are now slowing, this primary reason for the expansion is going away. Both note that copper has taken a nosedive and is now in recessionary territory.
4.) Because of the breadth of the downturn in their indicators, a recession is inevitable.
5.) He highlights that recent experience (1980-now) has been abnormal from a business cycle perspective. Shorter expansions (2-4 years) are more the historical norm. Here is a link to the NBER's recession dates, which confirms this statement.
There are three reasons why I disagree with his argument.
1.) Employment is already very weak. More importantly, companies cut a vast amount of jobs in the recession. Simply put, there just isn't much more fat they can cut. I don't see how we can have a massive amount of lay-offs leading to a spiraling downward in purchases leading to lower production etc...
2.) Housing is already very weak -- in fact, it never really recovered at tall. As NDD points out, you can't really have a recession if housing doesn't cooperate.
3.) The big Asian economies (India and China) are still growing at incredibly strong rates. While a slowdown is in the cards for both, the slowdown will be from high levels of growth (8%-10%).
The other "issue" I have -- and that's a poor word to use but the only one I have -- is, to my knowledge, ECRI hasn't formally released their methodology. Part of that's understandable -- they have a proprietary system that, so far, has been pretty good. But when you're making calls for a new recession, I'd like to see the data you're using the market the call.
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9 comments:
Agreed - it was a great interview.
I'm curious - do you disagree with ECRI's call, or do you just think it's premature?
I agree that it's hard to see how we have a recession right now, but ECRI does have a great track record. I sure hope this is the first time they blow a call.
Recent data coming out seems to flaty contradict ECRI. the LEI have been rising. Jobless claims have have fallen. ISM up more than forecast. Q2 revised updward a bit. Baltic dry index rising. Consumer confident up a bit from the bottom, apparently.
I'll take on your "three reasons" one at a time:
1.) "[C]ompanies cut a vast amount of jobs in the recession. Simply put, there just isn't much more fat they can cut."
You're right, bonddad. And so now -- without a customer base -- it's time to cut muscle and bone. So instead of non-growth in corporate size, we'll could be seeing plans for downright corporate shrinkage of lasting substance, at least in US-based operations.
2.) "[Y]ou can't really have a recession if housing doesn't cooperate."
Uh, huh. And housing prices can never go down. Except this time, when a homeowner loses their job, the odds of them walking away from their already-underwater mortgage will be much higher than the 2007-2009 recession. When it comes to foreclosures, can you say "new wave"?
3.) "The big Asian economies are still growing at incredibly strong rates. While a slowdown is in the cards for both, the slowdown will be from high levels of growth."
Yes, but they won't need to import more American goods to serve their own populations... will they? So their growth, even if sustained, won't do our economy any good.
When I listened to this guy from ECRI all the way through -- good tip, BTW -- I couldn't help but think that sometimes when you hear guys like him talk, you just know they know what they're talking about. He really impressed me, and I am inclinced to believe/trust his call, even if I don't know the precise details of his methodology.
It could be proposed that housing is *already* in a deep recession, and has been there for some years now. I am not saying you are wrong, but the same facts could be phrased differently.
Anon -- I disagree with the call. I see growth fluctuating around 0%. But I just don't see how much lower we can go given unemployment, housing and the strength of India and China. Now -- if those two countries really slow down, we're got big problems.
Jim -- housing prices are bottoming and while the market has been extremely low for the last two years, it's been a consistent low -- meaning, despite a massive crash, it has stalled here. To me, that indicates we're at literally the rock bottom in housing activity. To that end, I think George's point is solid -- housing is already in a terrible place and just can't get much worse.
Where can I find current national average price to rent ratios? Or do I have to find rental rates and home price indexes and calculate them myself?
Times like these are when economists earn their money or not. Even though bad economic policy can make an economy vulnerable to recession, sometimes recessions don't occur until some type of negative random event occurs. Because of uncertainty, no economic forecast is a sure bet.
This year, the economy has suffered a series of negative shocks. The Arab Spring, coupled with speculation, sent oil prices soaring. The Japanese earthquake slowed economic growth in Japan and even rattled the auto industry in the United States; and the debt debate debacle almost caused the financial system to collapse. These negative shocks caused economic growth to come to a screaching halt, but the economic data still does not support a recession. Perhaps, the best recent economic news is the strong domestic September auto sales.
Right now, the biggest threat is the possible Greece default. The question is whether the financial system will collapse if and when Greece defaults on their loans. Will a European banking collapse cause the US banking system to collapse?
I think the Greek disaster scenerio is very possible. Americans learned from the Great Depression that banks needed to be bailed out to prevent economic depressions during times of banking panics. In the Great Recession of 2008-09, Americans learned that bailing out banks makes the super rich bankers stay rich while much of the population still suffers from economic downturn. This has made Americans angry. Thus, if Greece defaults, and a banking panic spreads from Europe to America, Americans will demand to let the banking system collapse, thus allowing for the Second Great Depression to begin. However, the uncertainty is what have the Europeans learned.
I disagree with point #3. India and China may continue to grow but if they grow at slower rates what really matters is the rate of deceleration. Deceleration means lower revenues and lower earnings for the companies engaged in these countries. Combined with a stronger dollar, the lower overseas earning will appear outsized on the dollar-denominated financial statements.
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