Saturday, March 08, 2008

The Economists and the Pundits Are Starting to Agree that We are in a Recession

The front page of the Wichita Eagle tells us this morning that "Job losses point to recession," while the Wall Street Journal's lead story agrees: "Jobs Data Suggests U.S. In Recession."
Yesterday's employment report showed the third straight decline (after revisions) in payroll employment.

I have been saying for some time that the U.S. economy has been in recession since last spring or summer. That is what I told the
Wichita Eagle two months ago and have been saying in this blog. The data is starting to catch up with my analysis.

The rest of the profession is starting to come around. On January 27th, Lawrence Summers wrote in the Financial Times: "Markets and perceptions of the economic outlook change rapidly. Even two months ago most observers doubted predictions of a US recession, saw no need for a fiscal stimulus, and thought that inflation fears should constrain monetary policy. Now, ...[t]he debate about recession is ... about how deep and global its impact will be."

The one item good news emerged from yesterday's report: the unemployment rate fell for the second straight month. However it is subject to Harris's Second Law of Recession Watching: "every silver lining has a dark cloud over it when it comes to emerging news during a downturn. " The driver of this decline was a fall in the number looking for work, hardly evidence of reviving economic growth.

Wall Street follows the payroll employment data to the exclusion of the household survey which estimates the unemployment rate. The household survey data are very noisy and the government's benchmarking makes tracking it consistently over time difficult. This is a serious drawback since consistent time series are the lifeblood of business cycle analysis.

That said, the employment ratio provides a decent indicator of recessions with a slight lead. The message is remarkably clear: we are in one.

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