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Is This a Recession, and Should We Care?

by: James Hamilton June 07, 2008    

James Hamilton

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Could well be, and yes you should.

There is no question that we've been experiencing an episode of economic stagnation in which key indicators of output and employment are not growing at their usual historical rates. Some analysts take the position that this is all that really matters, and whether it meets the formal definition of a "recession" is a pointless question of semantics.

In support of such a position, there are a number of economic models quite popular among academics today that would warrant just such a perspective, in that they presuppose linear dynamic systems in which a "recession" is indeed just an arbitrary definition you would make up to characterize a string of bad luck.

I espoused the opposing view in a recent academic paper. I argued that recessions represent distinct and objectively identifiable episodes in which the usual dynamic factors that drive economic growth-- technological progress, population growth, and capital accumulation-- are replaced by a distinctly different dynamic in which lost income in some sectors feeds back into declines in output for others.

One of the defining characteristics of this phenomenon is the rapid rise in the unemployment rate that we've seen in every historical recession. It's very difficult to generate that kind of pattern from a system governed solely by linear dynamics, or interpret it from a perspective in which there's nothing special going on during a true economic recession.

 

BLS monthly civilian unemployment rate (from FRED), with NBER-dated recessions as shaded regions.

 

I was therefore quite alarmed by the 5.5% unemployment rate reported yesterday by BLS. Although the rate itself remains moderate by historical standards, the increase last month is the biggest monthly change that we've observed in over 20 years.

King Banian, Paul Krugman, and Howard Gold argue the numbers aren't that bad, reflecting a surge in young job seekers rather than a big decline in employment per se. I personally share the more pessimistic interpretations of Jared Bernstein, Calculated Risk, Michael Mandel, and Mark Thoma; (you can find other interesting discussion from Phil Izzo, Barry Ritholtz, Andrew Samwick, and Angry Bear).

It is true that the estimated May employment decline from the BLS payroll series was only 49,000, more moderate than the 285,000 drop implied by the household survey (from which the 5.5% unemployment rate is derived). But we've now seen 5 consecutive months in declining nonfarm employment as estimated from the BLS establishment survey, putting the overall level essentially back to where it was a year ago. Year-on-year employment stagnation is another thing we just don't see outside of an economic recession.

 

Year-over-year percent change in seasonally unadjusted number of U.S. workers on nonfarm payrolls, from BLS.

 

And while I'm collecting graphs that make me feel bearish, I can't resist updating this one, despite Menzie's cautions against reading too much into consumer sentiment numbers.

 

Reuters/Michigan index of consumer sentiment. Data source: FRED and Market Watch.

 

And how would one reconcile this view that the economy may already be in a recession with the very strong gains in the stock market on Thursday? Oops... never mind.

Source: Yahoo.
s&p500_jun_08.png

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This article has 9 comments:

  •  
    Jun 07 05:03 PM
    Good points; but I still don't care.
    Reply
  •  
    Jun 07 08:05 PM
    Interesting points, but I must say that if we are to consider this a recession, it has been (so far) milder than many if you look historically. My belief is not so much that things are going to get better soon, but that they aren't going to get as worse--if that makes sense.

    Lots of people here seemed upset at the ECB's decision to raise their interest rates, and while I have some questions about that too since it looks like Europe is developing their own housing problem, some European readers made a good point: even though it is bad for the dollar and hence raises oil prices--ergo, bad for consumers--the ECB should not have to worry about reckless central banking on our part.

    There seems to be two primary catalysts on this downturn: the housing and finance bubble bursting, and fuel prices. For what it's worth, in my opinion, the housing and finance mess seems to have bottomed out. Fuel prices will continue to be a problem. There are still plenty of buying opportunities out there, however, like natural gas companies. Too early though to be short oil.
    Reply
  •  
    Jun 07 09:39 PM
    Europe is prepared to fight inflation like Volker in the 70's the old fashion way by raising rates. We would do the same but without low rates and inflation the banking system could collapse. The Fed's plunge protection team through the banks are proping up the market to stave off a major drop but. The Fed is also trying to influence the job #'s adding 17,000 this past month. So much for george Bushes small goverment.
    Reply
  •  
    Jun 07 11:02 PM
    i wish this was a recesson, but it looks more like stagflation to me. I know it is not like the 70's because we are not experiencing wage inflation but I believe we are going to experience I long period (2-3 years) of low growth and high inflation.
    Reply
  •  
    Jun 07 11:37 PM
    personally, i sometimes wonder if growth is that important. why can't we be happy with stability? if your car is running at an optimal speed for the traffic, do you have to give it more gas? what is the point of going faster and faster? won't that eventually run you off the road?

    in a system where we have to drive the russians out of business and show others that capitalism is a wonderful way of life, that high revving engine of productivity is essential. but that's done now. so, maybe we can let the rest of the world do some pushing, while we sit back and enjoy the ride.

    maybe we can stop our industry and become a resort paradise, a large theme park, a vacation spot or the perfect place to retire. why should the island people be happy all the time while we work mine to five? don't worry, be happy. ooh, maan, me havin' a bad dream.
    Reply
  •  
    Jun 08 12:56 AM
    Is the title kidding? Who could possible think it isn't?! just compute in real terms, people! And yes, it matters.
    Reply
  •  
    Jun 08 02:09 AM
    "Recession, what recession" was CNBC's last Thursday headline, the Wall Mart and Costco sales gave a funny booster on that day's rally, what a farce, if economy is sound, then will TIF be a better indicator than the low priced packaging sale?

    When CPI shew the funny low rate, no one cares to talk about that data model cheats on food and housing, but when the jobless data was out, immediately the Invisible Gang say it was because of the teens.

    I missed Fischer Black, wonder what he would comment if he were still alive...

    Rick of CNBC is my hero.
    Reply
  •  
    Jun 08 08:46 AM
    king george iii "bush administration" says it is NOT a recession AND he doesn't care!
    Reply
  •  
    Jun 08 10:59 AM
    The 70% of the US economy related to consumer spending is very definitely in a recession (that probably has many months to run) and stocks linked to that sector already in bear-market downtrends even after the rally off the March lows. The 30% of the economy that does not revolve around domestic consumer spending continues to expand at respectable rates with few inventory overhangs or shortages of cash that would point to near-term problems. Most stocks in these sectors are in solid bull-market uptrends.
    Reply
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