Lauer Begs Barack to Say Economy's Headed to Recession

Talk about talking down the economy! No fewer than three times today, Matt Lauer invited Barack Obama to declare that the U.S. economy is headed into recession. At the end of a "Today" interview that focused largely on Hillary-related issues and Iran, Lauer turned to the economy and pressed Obama to predict the worst.

Employment is a lagging, not leading, indicator.

The fact that the CMT yield curve inverted about a year-and-a-half ago means that we will be in recession before fall of next year.

A saving grace is that the Business Cycle Dating Committee will probably not announce the recession until after November.

Employment is a lagging, not leading, indicator.

When there is job growth no one anticipated, it is a positive indicator.

Prior to a recession job growth may grow steadily and then fall off a cliff in the midst of a recession, but jobs appearing that no one was looking for is not part of that common trend.

The fact that the CMT yield curve inverted about a year-and-a-half ago means that we will be in recession before fall of next year.

There is no such predictive magic formula. And the yield curve is not inverted now.

No, the CMT yield curve IS such a predictive magic indicator, at least since the Great Depression. It has never registered a false positive, unlike the more widely quoted indices. For example, it inverted for a couple of days during October, 1998, indicating a recession within two-and-one-half years. The Business Cycle Dating Committee of the National Bureau of Economic Research later determined that a recession had indeed begun in March, 2001.

Yes, the yield curve is not inverted now. That is irrelevant, since the yield curve is a leading, not concurrent, indicator. That is why Stock and Watson pushed to have it included in the Index of Leading Economic Indicators.

Regarding job growth during recessions, again, the point is irrelevant. Some sectors thrive during a downturn while others languish. The common error is to associate job gains from yesterday’s economic growth with today’s economic performance, like Clinton’s minions did during the last decade.

I will grant you that the yield curve indicator is “just a rule of thumb” and, as such, ad hoc. About the only theory justifying it is the simple-minded expectations theory of the term structure of interest rates. The two-and-one-half year lag is a very long period. The frustrating thing is that it keeps on being right, recession after recession. Some of my colleagues maintain that rational expectations should result in such a magic formula’s becoming irrelevant after a sufficient number of economic agents acting on it undoes it, something like Lucas’ critique of econometric models. The problem with such an application is that no one seems to have advanced a theoretical mechanism by which such a rule of thumb is eliminated by its use in financial markets. It may be that programmed trading reinforces and perpetuates the rule of thumb, making it a self-fulfilling prophecy instead of eliminating it.

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