David R. Henderson  

Move Over, Stock Market: The U.K. Statisticians Are Contending

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In 1996, U.K. statisticians estimated 10 recessions between 1955 and 1995. In 2012, other U.K. statisticians "disappeared" 3 of them.

In 1966, the late Paul Samuelson stated that the stock market has predicted 9 of the last 5 recessions.

That's a propos of an email I received today from San Jose State University professor of economics Jeffrey Rogers Hummel. Jeff wrote:

As several of you know, I've criticized the regular comprehensive retrospective revisions in the U.S. National Income and Product Accounts because they sometimes change the estimates considerably. The classic example, first exposed by Rich Vedder and Lowell Gallaway in their neglected book, Out of Work, is when the 1960 revisions "discovered" a major post-World War II recession that no one knew about at the time.

I wrote about this post WWII case in my Mercatus study "The U.S. Postwar Miracle," November 2010. I wrote:
According to official government data, the U.S. economy suffered its worst one-year recession in history in 1946. The official data show a 12-percent decline in real GNP after the war. A 12-percent decline in one year would fit anyone's idea of not just a recession, but an outright depression. So, is the story about a postwar boom pure myth?

If you ask most people who were young adults in those years (a steadily diminishing number of people, so talk to them soon) about economic conditions after the war, they will talk about "the postwar boom." They saw it as a time of prosperity. Why is there a disconnect between their perceptions and the data? There are two reasons.

I titled this section of the paper "What Are You Going to Believe: The Data or Your Own Lying Eyes?" but the editor insisted on toning down the subtitle.

Jeff continues:

In reading Ken Rogoff's The Curse of Cash, I discovered that he notes the same problem with U.K. measures of real GDP (pp. 151-52). Citing the paper "Vintage Does Matter, The Impact and Interpretation of Post War Revisions in the Official Estimates of GDP for the United Kingdom" by Enrico Berkes and Samuel H. Williamson, he points out that "the number of technical recessions experienced by the United Kingdom between 1955 and 1995 is ten if we use the 1996 official UK historical GDP series, but it drops to seven if we use the 2012 series."

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COMMENTS (6 to date)
Andrew_FL writes:

The bond market seems to be better at predicting recessions than the stock market. If anything yield curve inversion has false negatives more than false positives.

I like the Measuring Worth site, there's lots of interesting historical data there.

Except for the 2007–9 recession, since 1960 I do not think I have been aware of any economic downturn while it was going on. I have been surprised when taking macro classes to learn that there were downturns during periods when I was engrossed: in finishing a graduate program, or trying to find a better job, or whatever was going on in my life.

Probably I would have been aware of the macroeconomic indications if I'd been a practicing macroeconomist or investment analyst, but I wasn't.

David R. Henderson writes:

@Richard O. Hammer,
Interesting. Before I was in a Ph.D. program, I wasn’t aware of recessions either. Maybe it was because my father was a public-school teacher. I remember the first mention of “boom” or “bust” that I ever heard was when I was working in a nickel mine in northern Manitoba in the summer of 1969. I was 18 and the youngest worker of 300. One night I was talking to some of the 40-somethings and we got talking about the amount of overtime we were getting. We were working every single Saturday. I was commenting on how valuable that was to me because it looked as if I would hit my target of about $1,900 net for the 3 months, enough to fund a year of college: tuition, room and board, and books. One 40-something guy said, “Work hard when the boom is on.” “What boom?” I asked. They then explained booms to me.

Glen Smith writes:

@David R. Henderson

In respect to the quote from your own article. I think it is quite obvious why many personal stories would disagree with the data. Most of us think of recession in terms of our local experience and not in terms of the aggregate data. For example, if in an economy of 10 people with a GDP of 10 where the top 2 take 8 units of GDP and the other 8 divide the last 2 units. A recession takes the total GDP down to 8 but that GDP is now distributed more equally for some reason. Would the majority of this group consider it a recession if the bottom 8 were now able to divide 4 among themselves, especially if they now make more than the minimum needed to just exist, while the top 2 divided the remaining 4? Never been to war but I'd imagine that, at least in the short term, no longer worrying about getting killed and seeing your friends get killed all the time (or worrying about such people) is an improvement in any case. People also seem to remember their salad days as much better than they were.

David R. Henderson writes:

@Glen Smith,
All of your points are really good. If I had known about you, I would have sent you that paragraph so you could help me rewrite it.
Here’s the larger context, though. The unemployment rate at the time--1946--was under 4 percent That’s why my parents’ generation (we were in Canada but conditions were similar to those of the United States) and other people of that vintage whom I talked to in the 1970s were always referring to the postwar boom.

Roger McKinney writes:
Paul Samuelson stated that the stock market has predicted 9 of the last 5 recessions.

That's still a better record that mainstream economists have. And the stock market never declared the end of the business cycle as mainstream econ did in the 1990s.

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