Arnold Kling  

My Favorite Economic Indicator

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Apparently, the echo chamber of left-wing macro pundits has pronounced a recession to be imminent. For example, Nouriel Roubini writes,


Given the recent flow of dismal economic indicators, I now believe that the odds of a U.S. recession by year end have increased from 50% to 70%.

For these pundits, the most dismal indicator is that we have a Republican Administration. They have been gloomy for six years now.

Just for the heck of it, I looked up my favorite indicator, the long-term average growth rate of productivity in the nonfarm business sector, calculated by the Bureau of Labor Statistics. From the first quarter of 2001 to the first quarter of this year, the average annual increase was 3.46 percent. That's a relatively high value.

But Michael Mandel says to expect downward revisions for numbers for the past two years.

UPDATE: the revisions were not all that large. Now, using Q1, the average annual increase is 3.29 percent, and using the preliminary Q2 numbers, the average annual increase since 2001 Q2 is 3.07 percent.


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CATEGORIES: Macroeconomics



COMMENTS (6 to date)
spencer writes:

You are right, productivity lagged two quarters is a great leading indicatoir. But over the last year it has slowed to 2.5% and with the recent downward revision of real GDP growth tomorrows report should revise that down. Moreover, with 2nd quarter real gdp growth only up 2.5% and hours worked up some 2% second quarter productivity is likely to be under one percent. Productivity growth implies a very sharp slowdown in real gdp growth.

But over the last 5 years real gdp growth has only averaged 2.5% -- maybe the "liberals" have been right to be pessimistic. Even if you throw out the first two years and look at the last three years of the Bush boom real gdp growth only averaged 3.2% as compared to the long term growth rate of the US economy of 3.5%. Previously when the five year growth rate was this low Kennedy ran on a campaign of "let's get the economy moving again" and Clinton said "it's the economy stupid"

Morever, the revison to real gdp show that under the Bush administration nonresidential fixed investment has only rebounded from some 10% to 10.4% of gdp. Since the bottom real capital spending has risen some 14% as compared to over 20% at the same point in the 1980s, 33% in the 1990s and over 50% in the 1960s. The record or facts imply that the "liberals" have had good reason to be pessimistic.

Remember,the s&P 500 is still below where it was when Bush was elected or took office. The last two presidents with this bad a record are Nixon and Hoover.

spencer writes:

P.S. Payroll employment is 1.1% above its December 2000 peak. Again, the worse record since Hoover.

So why shouldn't liberal pundits be gloomy?

Jason writes:

I think that investing based on political ideology is a surefire way to end up in the poor house. I also am skeptical of trusting economic predictions of people who have no money in the game, so to speak.

That being said, Roubini isn't alone in his bearishness - David Rosenburg of Merril Lynch also is sounding decidely more bearish. Though I still think assigning a percentage is a meaningless estimate.

From my perspective, it doesn't seem to make a lot of sense to be investing in risky assets in a rising interest rate/slowing economy environment - your upside is too limited, your downside immense.

Ivan writes:

Related news?
"According to statistics released by Robotic Industries Association (RIA), the robot trade group, new orders received by North American based robotics companies fell 38% in the first half of 2006."
http://robotgossip.blogspot.com/2006/08/us-robot-orders-decline.html

Roubini-1_Kling-0 writes:

well, you sure have a useless blog. Nothing he says has weight, but your O'Reilly style attack does. Gee, I wonder who the REAL economist is.

kharris writes:

Prof. Kling,

Is this your impression of the pot, or the kettle? Adopting the rhetoric of the right seems somehow odd, if what you intend is to represent yourself as a fair judge. Having read your writing for some time, I find that you are best when kept far from politics. You simply lose objectivity when politics are at issue.

The fact is that recessions happen. The fact is that recessions mostly do not happen after the economy has slowed, which the jobs and sales and, more tenuously, GDP data suggest is the case. If anybody who wants to say a recession is likely is a member of the left-wing echo chamber as long as a Republican is in power, how then are we to fairly assess the odds of recession, in your little world? You can stop pretending that it's those other guys who are biased.

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