I am channeling Ed Leamer, whom I chided in 2007 for denying the possibility of a recession even though his models were flashing red.
Leamer said
The models say “recession;” the mind says “no way.”
I’m going with the mind. This time the problems in housing will stay in housing. If you are a builder or a broker, it will feel like a deep depression. The rest of us will hardly notice.
Obviously, that was spectacularly wrong.
Well, now here we are a few years later and as ironic as it is I can’t help thinking something similar.
I look at a lot of fundamentals but at the end of the day the money markets drive my forecasts. The money markets are telling me in every possible way that recession is coming. Liquidity demand is rising, inflation expectations are falling, nominal interests rates are collapsing.
However, like Leamer in 2007, I am hard pressed to see what is left to recess? At the time Leamer doubted a recession because he didn’t think there were enough manufacturing jobs left to lose.
This time, I look at construction and local government and think the same thing. The cyclical employment sectors are already so far down. Are we going to start losing jobs in Health Care and Education at this point?
Its possible but its just so hard to wrap your mind around. It’s a macro-economic story that’s never been told.
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Wednesday ~ August 10th, 2011 at 10:56 am
DJAnyReason
http://en.wikipedia.org/wiki/Recession_of_1937–1938
Wednesday ~ August 10th, 2011 at 11:45 am
jamesoswald
In Leamer’s defense, he probably didn’t expect the Fed to pursue massively contractionary monetary policy for 3+ years either. Trying to forecast a policy response is a fool’s errand.
Wednesday ~ August 10th, 2011 at 4:56 pm
Nick Bradley
Tripling the monetary base is contractionary?
Thursday ~ August 11th, 2011 at 1:18 am
teageegeepea
It is with sterilization and paying interest on reserves when the alternative expected returns from investment are so low. Excess reserves have grown enormously, but they are just sitting there rather than flowing into the economy, like Hume’s bullion locked in chests.
Thursday ~ August 11th, 2011 at 5:32 pm
jamesoswald
The monetary base exploded in the Great Depression as well – and we got 30% deflation. Look at inflation, NGDP, exchange rates and the TIPS spread if you want to know about monetary policy. Read some Sumner and get back to me if you still think monetary policy is expansionary.
Wednesday ~ August 10th, 2011 at 12:49 pm
Gepap
There are still millions of public employees that plenty of Americans think need to get fired. And we have a lot of service sector employees that can be fired and over time replaced with fewer workers using more machines.
Wednesday ~ August 10th, 2011 at 1:24 pm
Wednesday links: indifferent markets | Abnormal Returns
[...] Where would a double-dip come from? (Modeled Behavior) [...]
Wednesday ~ August 10th, 2011 at 3:34 pm
Joel W
Arguments in your favor: Check out Gallup’s employment numbers. They basically tell a story of layoffs that have gone as deep as they can go, with more companies hiring. Interestingly amidst all this turmoil, gallup’s labor market measures have been neutral at worst, and the job index is still going up.
Likewise, multifamily REITs are doing well relative to the rest of the market. Here are the two biggest multifamily REITs as compared to the indexes: http://www.google.com/finance?q=NYSE%3AAVB+NYSE%3ACPT+index%3A.dji+index%3A.inx
Wednesday ~ August 10th, 2011 at 4:59 pm
Will Slaughter
I would argue the most important missing argument for a double dip this time is the shape of the yield curve. Nothing is impossible of course but if another recession develops it will be the first time in a long while it has not been preceded by an inverted 2s10s or 5s30s curve. The last 4 recessions in the US have all been cleanly flagged (about 18 months in advance) by an inversion of the yield curve. The inital inversion of the yield curve in 2006 should have strongly argued to trust the models in 2007. The hugely steep yield curve of today argues instead to trust the mind.
Thursday ~ August 11th, 2011 at 3:24 am
JasonSL
With bond yields so low right now, I’m not sure the lack of an inverted yield curve is as strong a piece of evidence as it might otherwise be. The curve is steep on the long-term end, but the 3mo-5yr spread (as good a predictor as the 2-10 or 5-30[1]) has contracted rapidly since the spring from a little less than 2.5 points to less than 1 point now. To my non-professional mind, this means increasing pessimism toward decent investment opportunities in the short-to-medium term.
The recovery has been anemic — the economy has to falter a lot less severely to go into recession again than it did in the run-up to previous recessions. In a way, zero is just a number when it comes to yield spreads.
On the other hand, short-term debt is nearly at the zero-bound. Segments of the would-be bond market may have short-term deflation expectations, but those folks are out of the bond market right now, so those expectations can’t be fully priced into bond yields. Not that deflation expectations are cause for cheeriness either.
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[1] http://research.stlouisfed.org/fred2/graph/fredgraph.png?height=480&width=800&id=TB3MS,DGS5&scale=Left,Left&range=Custom,Max&cosd=1962-01-02,1962-01-02&coed=2011-07-01,2011-08-08&line_color=%230000ff,%23ff0000&link_values=false,false&line_style=Solid,Solid&mark_type=NONE,NONE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a,a&fq=Monthly,Daily&fam=avg,avg&fgst=lin,lin&transformation=lin,lin&vintage_date=2011-08-11,2011-08-11&revision_date=2011-08-11,2011-08-11
Wednesday ~ August 10th, 2011 at 10:03 pm
The market, the economy, the point and figure chart | FMTrading Blog
[...] another blog I rate highly, Marginal Revolution. Double Dip: The Model Says Yes, The Mind Says No http://modeledbehavior.com/2011/08/10/double-dip-the-model-says-yes-the-mind-says-no/ However, like Leamer in 2007, I am hard pressed to see what is left to recess? At the time Leamer [...]
Thursday ~ August 11th, 2011 at 2:06 am
Wednesday links: indifferent markets
[...] Where would a double-dip come from? (Modeled Behavior) [...]