David Rosenberg, ex of Merrill Lynch, now of Gluskin Sheff, really crystallized what the “green shoot” crowd is missing in his daily memo of June 29 (all emphasis mine):
Most pundits who crow about green shoots and about an inventory restocking in the third quarter giving way towards some sustainable economic expansion live in the old paradigm. They don’t realize, for whatever reason, that the deflationary aftershocks that follow a post-bubble credit collapse typically last for 5 to 10 years. Businesses understand better than the typical Wall Street or Bay Street economist and strategist that everything from order books, to output, to staffing have to now be restructured to adequately reflect a permanently lower level of leverage in the economy.
He followed that up with this comment on the 30th:
I still find that most sell-side analysts live in the old paradigm of a classic manufacturing inventory cycle as opposed to a deleveraging credit contraction cycle, which typically takes years to resolve in terms of transitioning to the next sustainable expansion and bull market. Many economists are excited because auto sales seem on the verge of testing 10 million units, on an annual rate, when replacement demand is closer to 12 million — nobody is making money at that level of auto sales.
Rosenberg is making a key point: This is not the type of recession we have become accustomed to in the post-war era, and consequently will not play out as others have. Compounding that fact – and on a topic I hope to explore further soon – our demographics, frankly, suck. The “baby-boom” generation – those born between 1946 and 1964, the “pig in the python” – now has a median age of around 52 and is not in a position to consume as they did in the 2001 recession (median age: 44) or the 1990 recession (median age: 33). This is why all the hoopla over the last ISM print –“Every time it’s passed ~42 on the upside, recessions have ended” – is misguided.
Okay. Having gotten that out of the way, I want to focus a bit on the “green shoots” – those tidbits of data indicating a slower rate of descent – versus the reality of what the National Bureau of Economic Research’s Business Cycle Dating Committee actually look at.
In its most recent recession announcement (Dec. 2008), the NBER laid out – very specifically – some of the metrics they look at, where they’re found, and in some instances how they’re calculated. So, without further ado, here’s what they are and what they look like (commentary follows):
FRB index B50001
BEA Table 1.1.6, line 1
BEA Table 1.10, line 1, divided by BEA Table 1.1.9, line 1
BEA Table 2.6, line 1 less line 14, both deflated by a monthly interpolation of BEA Table 1.1.9, line 1 (Note: I used a different method of deflation – the NBER’s “interpolation” is cumbersome – that is used by the St. Louis Fed, and I spoke to one of their reps prior to doing the calculation.)
BLS Series CES0000000001
BLS Series LNS12000000
Census series tbtsla, adjusted, total business, deflated by monthly interpolation of BEA Table 1.1.9, line 1 (Note: This was also deflated differently, but in keeping with the St. Louis Fed’s work.)
AWHI, though not specifically mentioned by the NBER, is watched closely by BCDC member professor Jeff Frankel. He has written about it several times at his blog. (Hours typically precede bodies, both to the upside and to the downside.)
In a nutshell, one metric – Personal Income less Transfer Payments (adjusted for inflation) – is flatlining. Not rising, just flatlining. That’s it. So, for all the “green shoots” and “less bad” releases we’ve seen of late, I don’t see much in the world of NBER data that’s cause for celebration. The NBER is interested in peaks and troughs, not flatlines. Until we start seeing some clear signs of troughs (i.e. metrics actually improve and don’t just flatline), I’m dubious of any claims that the recession has ended.
