Barro’s Doubtful Recession Call – Econlib

Robert mud Recently asserted that the US entered recession as early as 2022:

The bottom line is, with the announcement of a two-quarter GDP contraction on July 28, we can be very confident that the US economy has entered a recession as early as 2022.

I believe that claim is highly unlikely to be true, although it is very possible that we are about to enter a recession. Barrow noted that since WWII, two consecutive quarters of negative RGDP have been associated with recessions. So why is he wrong in early 2022?

People make many mistakes when looking for statistical patterns. One is data mining. Thus they can observe that Super Bowl wins from former AFL teams are almost always associated with a certain stock market performance. Once the pattern is discovered, it usually proves implausible going forward, as there is no reason to expect such a correlation. Barrow Hall no Guilty of that sin. It has long been known that falling GDP is a good rule of thumb for recessions, and for good reason. He is not involved in data mining.

Barrow, however, is guilty of another mistake. He does not pay enough attention to other important facts that contradict his claims. For example, it is a good rule of thumb that industrial production always falls during recessions. Always. no hope. and still industrial production Grows very rapidly in the first 6 months of 2022 (at a rate of 5% per annum):

Here is another reliable pattern. Payroll jobs typically fall during recessions. On a few occasions, such as in 1974 and 1980, it rose modestly during the first months of a recession. But still the growth rate was falling. Furthermore, the 1970s and early 1980s were periods of very rapid growth in the labor force – employment trends were sharply higher (as both boomers and women entered the labor force in large numbers.)

In recent years, by contrast, our labor force has been very sluggish, mostly due to sharply lower immigration and retiring boomers. And yet despite very slow underlying growth in the labor force, employment grew at an extraordinary rate of 461,333/month in the first 6 months of 2022. This has never happened before during a recession. Indeed, not only is employment growth above the normal rate, This is faster growth in employment than in the United States during an economic boom. And the second half of the year the economy still started red hot, as 528,000 jobs were added in July.

In fact there are broad indicators whose behavior is completely inconsistent with the idea that the economy was in recession as early as 2022. One of these indicators is real GDP measured using the “income method”. That’s right, the US measures real GDP in two different ways, and one of those methods actually shows positive growth in the first quarter.

Instead of focusing on one metric, the NBER relies on a variety of monthly indicators, such as payroll employment and industrial production, not just quarterly GDP. Most of them suggest that the US experiences a strong economic boom as early as 2022. It seems very unlikely to me that the NBER would date a recession as early as the first quarter. I even doubt that a recession started in the second quarter, although I’d say it’s slightly more likely (say a 10% chance, vs. a 1% chance in Q1.)

I suspect that many economists are unaware that the quality of US macro data has been declining for decades. Modern economies are much harder to measure than the commodity-based economies of 100 years ago. This is why we see so many bizarre inconsistencies in data on variables like GDP.

In some cases, it is worse in other countries. Unlike the United States, many countries use two negative quarters as the official definition of a recession. This leads to some pretty absurd claims; such as that Japan There have been 4 recessions since 2007! Oddly enough, theirs unemployment rate The data shows only 2 of the 4 recessions:

In previous posts, I called the other two recessions (in the 2010s) “phony recessions.” The problem here is that Japan’s trend rate of RGDP growth has fallen to such a low level that even a small slowdown could briefly push RGDP growth below zero. When there is a real recession (such as during the global crisis of 2008 and the Covid crisis), you see a noticeable increase in the Japanese unemployment rate. In contrast, when there is a brief recession, say due to the timing of shopping around a Japanese sales tax increase, the labor market is largely unaffected.

If people insist on calling that minor recession a “recession,” that’s their prerogative. But if you’re going to do that, Don’t act like a slacker.

You said that was Japan recession in 2011 and 2014? Oh really, and why should I care?

Rest assured. You may be wondering about the decline in US industrial production in 2016. It wasn’t a recession, but it hit some sectors of the economy. This was caused by a combination of tighter finances and a drop in fracking (which uses much equipment made in the US). It probably cost Hillary Clinton the election, as it hit Pennsylvania, Michigan and Wisconsin more than other states. But in retrospect, I doubt Trump would have won in 2020 if he had lost in 2016, so it evens out in the long run.

PPS. Hillary would have reappointed Yellen, who would have implemented a low-inflation policy benefiting Trump in 2021. Trump appointed Powell, who was reappointed by Biden. Powell’s inflationary policies have made things more difficult for Biden. It’s funny how things work out.

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