John Hussman: Not Yet Out of the Woods

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John Hussman

“CAMBRIDGE September 20, 2010 – The Business Cycle Dating Committee of the National Bureau of Economic Research met yesterday by conference call. At its meeting, the committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion.”

NBER Business Cycle Dating Committee announcement

Very often, announcements by the Business Cycle Dating Committee are met with a good deal of media criticism. In most cases, this is because the announcements tend to come long after a turn in the economy is considered to be common knowledge. On this point, it’s important to recognize that the job of the Committee is not to predict or forecast the economy, but rather to set official dates for the beginning and end of U.S. recessions and expansion. In that sense, the Committee is an official arbiter of U.S. economic history.

In the present instance, the announcement that the recession ended in June 2009 has been criticized for an unusual reason – not because the announcement is so late that an expansion is already considered to be common knowledge, but rather because, to most Americans, it is not at all clear that the economy is in an expansion at all. On that front, it is important to recognize that the Committee took pains to make it clear that it was not forecasting the future or suggesting that economic progress has even been very good:

“In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month. The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007.”

Monthly measures of GDP show deteriorating economic momentum

In its release, the Committee noted that it “places particular emphasis on measures that refer to the total economy rather than to particular sectors.” These include “a measure of monthly GDP that has been developed by the private forecasting firm Macroeconomic Advisers,” and “measures of monthly GDP and GDI that have been developed by two members of the committee in independent research (James Stock and Mark Watson).”

The Committee generously provides downloadable data on these measures, which make for fascinating research. In particular, a review of that data suggests that the NBER may have to deal with the prospect of a “future downturn of the economy” much sooner than any of us would like.

Below, I’ve plotted the smoothed quarterly and 6-month growth rates of the Stock and Watson monthly GDP measure cited by the Committee, following the method of Zarnowitz and Moore (see last week’s update). The data is through June 2010. Note that the plunge in the smoothed growth rates occurred because even though GDP growth was positive for the second quarter, there was a sharp downturn in the monthly figures, which a variety of indicators also picked up (such as the ECRI Weekly Leading Index), and has unfortunately continued into the present quarter.

john hussman research

Though the Stock and Watson data has a longer history, the same downturn can be observed in the Macroeconomic Advisors data

john hussman research

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