Recession Terminology Needs to Change

Trust the Economist (magazine) to make the case that is both obvious and unsaid. Here the Sirs suggest that the very idea of Recession has evolved, and we need a new lingo.

To the average person, a large rise in unemployment means a recession. By contrast, the economists’ rule that a recession is defined by two consecutive quarters of falling GDP is silly.

...

A rise in unemployment is a good signal that growth has fallen below potential. Better still, it matches the definition of recession that ordinary people use. During the past half-century, whenever America’s unemployment rate has risen by half a percentage point or more the NBER has later (often much later) declared it a recession. European firms are slower at shedding jobs, so unemployment may be a lagging indicator. Even so, the jobless rate has usually started to rise a few months after the start of a recession. (underlining added)

Yes! This was the point I made last year. Economic pundits (including myself) have a nasty habit of pointing to the numbers that make their case, and downplaying others. One must examine which data really work as canaries in the coal mine, and after careful examination, two stand out: the unemployment rate and initial weekly jobless claims. What have they been signalling?

• Jobless claims are now 445,000, compared to 323,250 a year ago.
• The Unemployment rate is now 6.1, compared to 5.0 four months ago.

This is an employment recession. And it is highly suggestive of a full blown recession in 2009.

And it must be said that the four key data series used by NBER for their recession assessment do not include the unemployment rate, but instead include a measure of payroll jobs that tends to be problematic during turning points. Any defenders of the payroll survey want to pipe up now and say those relatively placid numbers are better indicators than the unemployment rate?  Face it, a recession hit on payrolls will produce revised monthly losses like -431 (May 1980) or -208 (Aug 1990), not the paltry (and unrevised) -80 and -60 we're seeing.

Why a Recession Now?

I am tempted to say this is a self-fulfilling recession, and that America's loyal opposition (Democratic party) has been unforgivably negative on the economy for many years. I am also tempted to say that the once-ruling Republican party (which lost Congress to the Democrats in 2006) became unforgivably negative during the immigration debate of 2006-07 when they suddenly blamed Mexicans for hurting an economy that they had moments before said was the best ever. But the downturn today was not so much caused by political negativity as it was by political malpractice.

Oddly, neither party which was supposedly concerned about a weak economy a couple of years ago made a serious effort to fix the housing bubble, even as it was being pumped up by Fannie and Freddie in 2004, 2005, 2006.

It should also be remembered that the "jobless recovery" of 2003-4 was huge. That was when pessimists pointed to weak payroll numbers, and scoffed at anyone who said the unemployment rate (healthy at the time) was a better indicator. Their preferred remedy for the so-called jobless recovery? Lower Interest rates! And that's what we got.  So that's what I mean about a self-fulfilling recession.

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It should also be remembered that the "jobless recovery" of 2003-4 was huge. That was when pessimists pointed to weak payroll numbers, and scoffed at anyone who said the unemployment rate (healthy at the time) was a better indicator. Their preferred remedy for the so-called jobless recovery? Lower Interest rates! And that's what we got. So that's what I mean about a self-fulfilling recession.