The Case for Recession Is Wrong

FOR YEARS, AS the economy has boomed, the permabears have said recession is just around the corner. They've been wrong. Now there's a little bit of evidence of an economic slowdown, and those same bears are declaring victory — they're saying the recession is right here, right now.

We shouldn't be too surprised at a bit of a slowdown here. After all, despite the housing downturn, 2007 was a high-growth year by and large. It wouldn't be out of pattern to have to give back a little for a couple quarters just in the normal cycle of things.

And with six months of relentlessly negative sentiment about housing, subprime lending and the credit crisis, it wouldn't be too surprising to see consumers and businesses acting a bit cautious for a short while.

But that sure doesn't mean we're in a recession. Nor does it mean recession is imminent. We've had a couple of soft quarters during this economic expansion already. Remember the bad quarter right after the shock of hurricanes Katrina and Rita in late 2005? Sentiment was pretty bad then, too. There was a bad quarter. But then we came roaring back.

But the permabears don't care. And they've been so very wrong for so very long, they've had plenty of time to hone their arguments. They actually sound pretty convincing — unless you look closely at the facts.

Consider the case of Robert Rosenberg, the celebrated economist for Merrill Lynch. He's been bearish forever (that didn't stop Merrill Lynch from throwing away untold billions on foolish investments in exotic subprime mortgage derivatives — but that's another story). Rosenberg is one of those economists who is very facile at quoting economic statistics — and massaging them to make his bearish case. Unless you're an economist yourself, it's pretty easy to get swayed by his seemingly authoritative arguments.

This week, following the announcement that the unemployment rate has risen to 5% from a low of 4.4% earlier this year, Rosenberg has gotten a lot of publicity "proving" statistically that this means we're heading into recession. He told Merrill clients: "At no time in the past 60 years has the unemployment rate risen 60 basis points (50 bps is the actual cutoff) from the cycle low without the economy slipping into recession..." And he attached a chart, claiming that this was true "100% of the time."

But let's look a little closer. Note that Rosenberg cheats a bit by talking about rises in the unemployment rate "from the cycle low." What does that mean? How do you know when you're at the "cycle low," until months or years have gone by and you can identify a particular moment as a "cycle low?"

This is important, because there have been times when the unemployment rate has risen by 50 basis points, or more, when a recession did not follow. But apparently Rosenberg doesn't count those, because those weren't a "cycle low" according to his personal definition. So when you look at all the data, not just the examples that fit Rosenberg's argument, what he claims is not actually true "100% of the time."

One example is February 1986, when the unemployment rate surged from 5.7% to 6.2% in a single month. No recession followed. The next recession was not until 1990.

Rosenberg also told Merrill clients that "Aggregate hours worked in the economy contracted at a 0.4% annual rate in 4Q, and this comes on the heels of a 0.6% decline in 3Q. Back-to-back declines in total hours worked have always been associated with recession."

Huh? My friend Michael Darda, a young economist at MKM Partners, pointed out to me that aggregate hours worked didn't contract at all in the fourth quarter of 2007 — they grew! Can an economist as eminent as Rosenberg simply have gotten it wrong?

So it seems. I checked it out at the web site of the Department of Labor, who compiles these statistics. In the fourth quarter of 2007, aggregate hours worked increased, by almost 1% at an annual rate. And in the third quarter, they also increased, this time at an annual rate of more than 1.2%.

How does this fact change Rosenberg's analysis? I'm guessing — but something tells me it wouldn't change it at all. Maybe he'd point out that even though hours grew in both quarters — rather than contracting — it's still bearish, because they grew less in the fourth quarter than they did in the third. A permabear is a permabear is a permabear.

Rosenberg isn't the only one to get the data wrong. The Department of Labor frequently revises its employment statistics. And there's good reason to think that last month's tepid jobs report will be revised higher.

Darda says, "jobless claims, which have declined over the last two weeks, are not showing the 25% year-to-year rises that are usually preludes to recession. Also, the ISM Non-Manufacturing Employment Index rose in December. This index is highly correlated to job gains, and along with the claims data, suggests a material upward revision to the December jobs figures."

So maybe things aren't so bleak. But let's assume for one moment that they actually are. What if we really are going into recession. Should you bail on stocks?

You'd think so. But then again you'd think that Merrill Lynch's economist would get his statistics right. The reality, in both cases, is something else entirely.

Over the postwar era, stocks have actually performed well during recessions. Over 11 recessions, the average total return for the S&P 500 has been 9.1%.

The worst case was an 8% loss, and that was in the vicious and prolonged recession of 1974-75. There were three other losers, in each case only about 1%. The best case was a gain of 24% in the recession of 1953-54.

According to my model, stocks are dirt cheap on a valuation basis vs. rock-bottom bond yields. That tells me that even if Rosenberg is right, the coming recession could be a winner for stock investors.

And if Rosenberg is wrong — and I have reason to believe he is — the coming not-recession could be even better.

But making things was the "old economy." The "new economy" provides services. Last year, 1,428,000 private sector service jobs were created.

Are the "free trade" propagandists correct that these service jobs, which are our future, are high-end jobs in research and development, innovation, venture capitalism, information technology, high finance, and science and engineering, where the U.S. allegedly has such a shortage of scientists and engineers that it must import them from abroad on work visas?

Not according to the official job statistics.

What occupations provided the 1.4 million service jobs in 2007?

Waitresses and bartenders accounted for 304,200, or 21 percent of the new service jobs last year and 29 percent of the net new jobs.

Health care and social assistance accounted for 478,400, or 33 percent of the new service jobs and 45 percent of the net new jobs. Ambulatory health care and hospitals accounted for the lion's share of these jobs.

Professional and business services accounted for 314,000, or 22 percent of the new service jobs and 30 percent of the net new jobs. Are these professional and business service jobs the high-end jobs of which "free traders" speak? Decide for yourself. Services to buildings and dwellings account for 53,600 of the jobs. Accounting and bookkeeping services account for 60,500 of the jobs. Architectural and engineering services account for 54,700 of the jobs. Computer systems design and related services account for 70,400 of the jobs. Management consultants account for 88,400 of the jobs. From here.

According to the BLS's own website Financial services lost 4 percent last year.

Note that Rosenberg cheats a bit by talking about rises in the unemployment rate "from the cycle low." What does that mean? How do you know when you're at the "cycle low," until months or years have gone by and you can identify a particular moment as a "cycle low?"

Kinda like how Greenspan wants us to believe that you can't know you're in a bubble until after it popped?

Ok, I'm in full agreement here...

So when you look at all the data, not just the examples that fit Rosenberg's argument, what he claims is not actually true "100% of the time." One example is February 1986, when the unemployment rate surged from 5.7% to 6.2% in a single month. No recession followed.

What kind of third-rate sophistry is this? Apparently that didn't fit his definition of the "cycle low"! You've had your "months and years"; tell us why it was a cycle low. Show us a graph or something with a big spike in it or something, don't just lash out with accusations of cherry-picking.

Ah wait, I happen to have a graph right here. When's that evil manipulation of data, February 1986? Here you go Donald, let's find out who the cherry-pickers are, shall we?:

This guy is a regular on Kudlow & Company, and lives down to the show's reputation for half-truths, outright lies, twisted definitions, selective data use, and third-rate use of logic, and this article proves it.

Let me guess, he didn't write a word about Goldman Sachs, the most inside, well-connected, establishment, investment bank in the country, also calling for a recession, because their call came out 24 hours later and he already put this article to bed?

WHEN PRESIDENTS SPIN THE ECONOMY
By MICHAEL WALDMAN, New York Times, December 27, 2000

WASHINGTON - In recent days, President-elect George W. Bush and his aides have warned that the economic boom may be ending - badly. Earlier this month, Vice President-elect Dick Cheney even said, “We may well be on the front edge of a recession.”

President Clinton’s aides have publicly scolded the new team, charging it with talking down the economy. In reply, Mr. Bush’s press spokesman, Ari Fleischer, said that on the Bush team “we dismiss the notion that politicians can talk the market down any more than they can talk the market up - that’s not how markets work.” Investors, he added, “are a little more sophisticated than to listen to politicians on that score.”

Perhaps that’s true when it comes to candidates’ rhetoric. But presidential words can have a sharp impact on the economy. That’s why they must be used responsibly.

To be sure, incoming presidents always want to show that they’ve inherited problems from their predecessors. In a famous leaked memo to the newly elected Ronald Reagan, David Stockman and Jack Kemp, then both congressmen, warned that “the momentum of short-run economic, financial, and budget forces is creating the conditions for an economic Dunkirk during the first 24 months of the Reagan administration.” Not coincidentally, the memo urged a massive tax cut as a remedy. And in 1992, at a point in the Bush administration when growth was wobbly, candidate Bill Clinton said he would “focus like a laser beam on the economy.” As an incoming president, he noted that the economy was coming out of a recession and then added - self-protectively - that he was worried the recovery wouldn’t be strong or permanent.

But those presidents-elect were facing clear economic trends. Today, as George W. Bush warns about a hard landing, most economists say they expect the economy to slow, but not to slip into recession. The trouble is, many Americans may be unable to hear the difference. At a time when roughly half of all households own stock, an economy that lives by continuous cable television business shows can die by continuous cable television business shows. A jittery public’s response to warnings can help create actual bad news - through panic selling on Wall Street or restrained Christmas buying at the mall.

That’s why sitting presidents try, with varying success, to calm economic anxieties. Dwight D. Eisenhower once warned his cabinet that a downturn was approaching, but urged them to call it a “rolling readjustment” instead of a recession. Alfred Kahn, Jimmy Carter’s inflation fighter, was once scolded by political aides for using the “R” word in public. Fine, he said at a press conference - from then on, he would call it a banana.

As president, George Bush also thought recession talk, well, wouldn’t be prudent, even when there were a couple of quarters of recession on his watch. (Criticized for his silence, he occasionally swerved in the other direction, as when he once declared that the economy was in “free fall” when it wasn’t.)

After some initial missteps - as when a careless comment opposing the propping up of the dollar sent the currency plummeting in 1994, Mr. Clinton learned that a president’s words echo loudly through the economy. I saw it in 1996, as I was writing that year’s State of the Union address. The economy had been inching forward, but press assessments were grim, and polls showed that one in three citizens thought things were actually worsening.

Congressional Democrats privately urged Mr. Clinton to accentuate the negative - to focus on the anxieties of those who feared losing their jobs. Instead, he went for a strikingly positive view, asserting the economy was “the healthiest it has been in three decades.”

And the Clinton administration continued to talk optimistically, declaring the glass not just half full, but brimming. Eventually, press coverage helped spur rising consumer confidence, with direct economic results. American consumers’ cheerful determination to keep buying in 1998, for instance, helped the economy thrive despite the Asian financial crisis.

This is not to say that President- elect Bush should be a Pollyanna; the slowing economy is cause for concern. But if continued bearish talk becomes a factor that helps tip the economy into a slump, the consequences could be harsh. Besides, on Jan. 20, the economy is his. Recession warnings may help Mr. Bush pin blame elsewhere. But if the economy’s hoped-for soft landing does turn into a crash, cleaning up will be his problem.

Michael Waldman, former chief White House speechwriter, is the author of “Potus Speaks: Finding the Words That Defined the Clinton Presidency.” Source: http://iskran.iip.net/review/december00/3nyt1.html

COMMENT: Hillary Clinton's hypocrisy has never been more blatant or more dangerous, except when she worked to bring about failure in Iraq. Her tactic this time is to induce fear of a recession among voters--with 24/7 help from the pro-Democrat media. She thinks she can win votes by creating the self-fulfilling prophecy that Clinton's speechwriter warned about. It is a hypocritical defeatist mentality akin to Daschle's fight to obstruct Bush's tax cuts that brought the economy back to health. Shame on Hillary Clinton.

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