Summary: The Internet can make us smarter — or dumber. Google “Dude, where’s my recession” for a splendid example. Thousands of hits for what might be the dumbest tagline of 2008. This post discusses why accurate economic forecasting is so difficult, what we know about current conditions, and recent warnings from one of our top economists.
A follow-up post replies to points raised in the comments: When did “Dude” predict a recession? How severe?
Economic statistics work for us like the whiskers on a cat. As we move into the unknown future, they hint at what lies ahead. Almost all US economic numbers have decelerated over the past 2 or 3 quarters. This is a clear warning signal, but useful only if people act on it. Build savings. Be careful when starting new projects or switching jobs. Carefully watch the risk in their households’ balance sheets.
Nobody can say what comes next — economic science is immature, the data too poor — but ignoring the data is imprudent, even foolish. Those who write commentary that casually dismiss this data do a disservice to their readers. The ‘where is my recession, dude’ meme is not funny, and imo actively harmful. The web gurus who propagate this reenact the story of the grasshopper and the ant, acting as cheerleaders for the grasshopper. Most Americans are not adequately prepared for a downturn, so this cheerleading could have unpleasant consequences for some of their readers.
What we know about the US economy
The consensus forecast of economists, as measured by services such as the Blue Chip Financial Forecasts, rarely successfully forecast a recession. So what do we know?
I. The economy very seldom rolls over quickly, except from an external shock (e.g., the 1973 oil embargo). The US economy is a $13 trillion ship. It turns slowly.
II. US recessions are defined by the National Bureau of Economic Research (NBER) as follows:
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. … Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them.
… Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in economic activity.” Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.
III. Almost every US economic indicator is now in well off its peak, in slow decline, and entering typical recessionary or pre-recessionary levels.
IV. We might be in a recession right now and not know it. A recession typically means that GDP declines by 2% (more or less) per year. We can no more detect that by our personal experience than we can sense a slow 2% change in the air temperature. These things are visible only in the macroeconomic data.
V. Since the “real time” economic data is hideously unreliable (subject to large revisions many months later), recessions are determined well after the fact. Most current economic numbers (before revisions) are unreliable for three reasons.
- We have a large, complex, and constantly evolving economy — all of which make it difficult to measure.
- Most economic metrics are abstractions. Measuring GDP, personal income, or inflation is not like counting apples.
- The government statistical apparatus is grossly underfunded. We get the economic statistics we pay for.
Update: who started this nonsense?
The Instapundit says that the “Dude, where’s my recession” line was coined by James Pethokoukis, the money and politics blogger for U.S. News & World Report. Here is an example of his reasoning, an excerpt from “The Strangest Recession in Economic History” (29 May 2008):
What do you call a recession where the economy keeps going up and up, even if a bit sluggishly? Well, my friends, you call that an expansion. And that is what we seem to have right now, despite all the economic doomsaying about a recession or even a Great Depression 2.0. Today, the Commerce Department revised its first-quarter estimate of gross domestic product upward to 0.9% from 0.6%. That follows 0.6% GDP growth in the final quarter of 2007. The revision also makes it more likely that the second quarter will be positive, maybe 1.5%, maybe even higher.
Now I went back and checked the numbers for the past 50 years and didn’t find a single case of a recession – as calculated by the National Bureau of Economic Research – that started with or contained two straight quarters of positive GDP growth, much less three quarters.
… No one is saying the economy is booming. Clearly, we are in the midst of dramatic slowdown.
In hindsight you sometimes call it “a recession that just started.” Real Q2 GDP might easily be negative. Most economists have only recently come to expect a serious slowdown, starting in Q1 or Q2. There are always outliers on each side of the consensus — some predicting booms, some predicting busts — as everyone struggles with the ambiguities of the data and trends. There is no basis for Pethokoukis’ to talk as if he is a truth-teller, someone external or superior to this analytical process.
(1) As Feldstein notes below, GDP numbers represent the average level of economic activity during a quarter. The slowdown might have accellerated late in the first quarter, which would be consistent with the current data — and become even more consistent if the numbers are revised down.
(2) Guesses about Q2 GDP are no more than that. We have some reliable data on April, a little on May, and almost nothing on June.
(3) We will remain uncertain about Q2 results for several months after the end of Q2. Indicators tend to be revised down — often far down — during recessionary periods.
(4) Pethokoukis’ appears to have great confidence about his forecasting ability. It is probably unwarranted. History shows that recessions are seldom visible until we are in them, which is why consensus economist forecasts seldom expect a recessions even as we are sliding into one.
Where is the economy now in the business cycle?
There are many economists who have accurately forecast this slowdown. Here are two articles by Martin Feldstein, President of NBER, explaining what we know. Since NBER defines the cycle, we should listen to this man.
“Our Economic Dilemma“, Wall Street Journal (20 February 2008) — Excerpt:
Although it is too soon to tell whether the United States has entered a recession, there is mounting evidence that a recession has in fact begun. Key measures of economic activity stopped growing in December and January or actually began to decline. The collapse of house prices and the crisis in the credit markets continue to depress the real economy.
The sharp reduction in the federal funds interest rate and the new fiscal stimulus package may, of course, be enough to avert a downturn. Many forecasters still predict that the economy will just slow in the first part of this year and then rebound after the summer. But the hope that monetary and fiscal policies would prevent continued weakness by boosting consumer confidence was derailed by the recent report that consumer confidence in January collapsed to the lowest level since 1992.
If a recession does occur, it could last longer and be more painful than the past several downturns because of differences in its origin and character. The recessions that began in 1991 and 2001 lasted only eight months from the start of the downturn until the beginning of the recovery. Even the deeper recession of 1981 lasted only 16 months.
More recently he sounded another alarm.
“Misleading growth statistics give false comfort“, Financial Times (7 May 2008) — Excerpt:
Prepositions matter. The recent government report that US gross domestic product increased 0.6 per cent in the first quarter was very misleading. It implied that economic activity was rising in January, February and March. But the increase actually refers to the rise from the average level in the fourth quarter of 2007 to the average level in the first quarter. Monthly data since January indicate that economic activity and GDP have been declining since the start of this year.
Private sector payroll employment peaked last November and has fallen five months in a row, shedding more than 300,000 jobs. Industrial production was lower in March than in December and January. Real personal income net of taxes and transfers is also lower than in January. Real retail sales have fallen since the start of the year. Private housing starts are down 13 per cent in just the two months since January and 36 per cent from a year ago.
Although the government does not provide monthly estimates of GDP, Macroeconomic Advisers, a private forecaster, constructs them using the same conceptual approach as the government uses for its quarterly estimates. The company estimates real GDP based on the price level of the year 2000. Its most recent estimates (revised figures to be published this month) show that real GDP rose from an annual $11,649bn last October to $11,701bn in December and $11,777bn in January but fell to $11,686bn in March, a decline of about $100bn in two months. Although GDP declined during the first quarter, the average of the monthly figures in the first quarter ($11,711bn) is higher than the average of the monthly figures for the final quarter of 2007 ($11,675bn).
The misstatement that the economy expanded in the first quarter creates an inappropriately sanguine view of the months ahead and therefore reduces the prospect of strong action to prevent the deep decline that may otherwise occur. Carlos Gutierrez, the commerce secretary, whose department produces the GDP estimates, said the 0.6 per cent increase supported the administration’s view that growth would be slower but positive in the first half. The administration predicts that after this slowdown the economy will grow more rapidly in the second half and in 2009.
Although the tax rebates now under way may provide some temporary help, the combination of falling real incomes, declining household wealth and a dramatic drop in consumer confidence suggests further falls in consumer spending and GDP. But the most serious risk is that the rapid fall in house prices – down more than 12 per cent in the past year and falling at a 25 per cent rate in the past three months – will raise the number of negative-equity mortgages, leading to widespread defaults and foreclosures.
Other posts about the Internet: does it make us smarter or dumber?
- Cable Cut Fever grips the conspiracy-hungry fringes of the web (7 February 2008)
- Resolution of the Great Submarine Cable Crisis — and some lessons learned (8 February 2008)
- What do blogs do for America? (26 February)
- The oddity of reports about the Iraq War (13 March 2008)
- Euphoria about the Bakken Formation (10 April 2008)
- The Internet makes us dumber: the Bakken euphoria, a case study (15 April 2008)
For more information about geopolitical implications of current economic trends
A brief note on the US Dollar. Is this like August 1914? (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
The post-WWII geopolitical regime is dying. Chapter One (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
We have been warned. Death of the post-WWII geopolitical regime, Chapter II (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
Diagnosing the eagle, chapter I — the housing bust (6 December 2007) — What the housing bust shows about America’s fitness to survive.
Death of the post-WWII geopolitical regime, III – death by debt (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
Geopolitical implications of the current economic downturn (24 January 2008) – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession? (18 March 208) — More forecasts. The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
The most important story in this week’s newspapers (22 May 2008) — How solvent is the US government? They report the facts to us every year.
To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.