Monday, October 3, 2011

ECRI Calls For New Recession

This is a really good interview.  You should watch the whole thing.  Here are the main points

1.) Yes, there was an expansion.  You don't create over 1 million jobs in a recession.  However, total establishment jobs are still about 6.8 million below previous levels.

2.) Initial claims have yet to move below 400,000 in a big way.  This indicates the labor market is in very weak shape.

3.) Exports were a primary driver of the last expansion.  Because Europe and Asia are now slowing, this primary reason for the expansion is going away.   Both note that copper has taken a nosedive and is now in recessionary territory.

4.) Because of the breadth of the downturn in their indicators, a recession is inevitable.

5.) He highlights that recent experience (1980-now) has been abnormal from a business cycle perspective.  Shorter expansions (2-4 years) are more the historical norm.  Here is a link to the NBER's recession dates, which confirms this statement.

There are three reasons why I disagree with his argument.

1.) Employment is already very weak.  More importantly, companies cut a vast amount of jobs in the recession.  Simply put, there just isn't much more fat they can cut.  I don't see how we can have a massive amount of lay-offs leading to a spiraling downward in purchases leading to lower production etc...

2.) Housing is already very weak -- in fact, it never really recovered at tall.  As NDD points out, you can't really have a recession if housing doesn't cooperate. 

3.) The big Asian economies (India and China) are still growing at incredibly strong rates.  While a slowdown is in the cards for both, the slowdown will be from high levels of growth (8%-10%).

The other "issue" I have -- and that's a poor word to use but the only one I have -- is, to my knowledge, ECRI hasn't formally released their methodology.  Part of that's understandable -- they have a proprietary system that, so far, has been pretty good.  But when you're making calls for a new recession, I'd like to see the data you're using the market the call.