In his latest weekly letter, investor John Hussman reiterates his belief that we are already in recession.
In regard to a U.S. recession, keep in mind that the consensus of economic forecasters – not to mention central bankers – has never recognised the start of a recession in real-time, largely because their assessments typically revolve around a “stream of anecdotes” approach that treats each new economic report with equal weight, without distinguishing leading/lagging and upstream/downstream structure. For example, we’ve noted that real consumption growth and real income lead new factory orders, which lead employment. Yet observers have already largely dismissed the soft data on income, consumption and factory orders thanks to last week’s single outlier on new weekly unemployment claims. As for the payroll report this Friday, we fully expect that September payroll growth will ultimately be reported as a significant loss in jobs. The main wrinkle, as I’ve noted frequently, is that the “real-time” employment figures in the early months of a recession are often hundreds of thousands of jobs off from where they are ultimately revised (see the economic notes in Late Stage, High Risk). So while Friday’s employment report seems likely to be disappointing, the data tends to be heavily revised, and even the seasonal adjustments amount to hundreds of thousands of jobs, so our expectations for a negative figure may or may not be realised in the initial report.
Last week, the second quarter GDP growth figure was revised down to 1.3%, from the previous estimate of 1.7%. Durable goods orders plunged at a 13.2% rate in August, largely on reduced transportation orders, but even ex-transportation, new orders dropped at the sharpest rate since 2009. It is also notable that Gross Domestic Income – the theoretically equal “income” companion of gross domestic “production” – grew at an annual rate of just 0.1% in the second quarter. The difference between GDI and GDP is nothing but a statistical discrepancy, so the two series track each other very closely over time despite short-term disparities. Because GDI has often led GDP at recessionary turns, Alan Greenspan was well-known for paying close attention to GDI – though not closely enough to recognise that the economy was already in recession when he was interviewed by Business Week in mid-2008, fully two-quarters after that recession had actually begun.
The chart below presents the 6-quarter growth of real gross domestic product (GDP) and real gross domestic income (GDI) since 1950. A good look at this chart provides some insight into why recession concerns have had a “Chicken Little” quality in recent quarters. Note that by the time the 6-quarter growth in income and production has slowed below 2.3% in the past, the economy was always either approaching or already in recession. It’s also worth observing the weakness in GDI growth approaching the 1990-91 and 2008-2009 recessions.
In the present instance, the 6-quarter average of real GDI and GDP growth has been below 2.3% for nearly a year, with no apparent recession, and in fact has bounced around that threshold since 2010. The monetary interventions of the past few years have helped to kick the recessionary can down the road in short-lived fits and starts. Still, they certainly have not been effective in producing sustained recovery (nor should they be expected to – being largely a manipulation of financial markets with no reliable transmission mechanism to the real economy).
The key question is whether the absence of an obvious recession should be taken as an indication that the deterioration in income and output growth can be ignored – in effect, whether we should assume that this time is different. From our standpoint, the evidence from a wide variety of economic series, including but not limited to broad measures like GDI and GDP, continues to indicate that the U.S. economy most likely entered a recession in the middle of this year.