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Thursday, January 14, 2016

Duy: "So You Think A Recession Is Imminent ..."

by Calculated Risk on 1/14/2016 10:51:00 AM

From Tim Duy: So You Think A Recession Is Imminent, Employment Edition

The recession drumbeat grows louder. This is not unexpected. Most forecasters have an asymmetric loss function; the cost of being wrong by missing a recession exceeds the cost of being wrong on a recession call. Hence economists tend to over-predict recessions. Eight of the last four recessions or so the joke goes [1]. And while I don't believe a recession is imminent, there are perfectly good reasons to be wary that a recession will bear down on the economy in the not-so-distant future. Historically, when the Fed begins a tightening cycle, the clock is ticking for the expansion. By that time, the economy is typically in a late-mid to late-stage expansion, and you are looking at two to three years before the cycle turns, four at the outside.

Of course there are some not so good reasons for worrying about a recession. Like listening to an investor talking their book. Or someone who needs to whip up a never ending stream of apocalyptic visions to hawk gold.

So what I am looking for when it comes to a recession? It's not a recession until you see it economy wide in the labor markets. When it's there, you will see it everywhere. Clearly, we weren't seeing it in the final quarter of last year. But, you say, employment is a lagging indicator, so last quarter tells you nothing. Not nothing, I would say, but a fair point nonetheless. One would need to look for the leading indicators within the employment data.
Bottom Line: From a labor market perspective, I am not seeing conclusive evidence of an impending recession in manufacturing, let alone the overall economy. Might be at the tip of one, but even that will take a year to evolve. I have more sympathy for the view that the economy has evolved into a mid-late to late stage of the cycle, and the transition and associated uncertainty results in some not-surprising volatility in financial markets.
Dr. Duy is looking at labor indicators. My favorite leading indicators for a possible recession are housing starts and new home sales. No worries right now - I'm not even on recession watch.

[1] Duy added:
Greg Ip calls me out on the direction of forecast accuracy ... if you were to tell me that these recession callers were not on average "economists" I would concede the point. And forecasts from official agencies such as the IMF and the Federal Reserve always miss recessions (a point Larry Summers makes with regard to the IMF here.) So Ip's point is well taken.