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Why do you care about recessions?

I recently discussed the current German recession, which is accompanied by a very strong labor market. In a recent post, Tyler Cowen provides a summary of Czechia’s recent recession, which shows the same pattern. In another post, he links to a Jason Furman tweet on the puzzling pattern of US growth in income/output:

Unlike many other countries, the official (NBER) definition of recession does not involve two negative quarters, but lots of people wrongly believe it does.

I’m interested in another question—why do we care about recessions?

I cannot be certain, but I suspect that many people fall for the following logical fallacy:

A implies X

A is strongly correlated with B

B implies X

I think I know why we care about recessions. Recession are generally associated with lousy labor markets. The high unemployment of the 1930s was such a severe social problem that it put macroeconomics on the map as an important field of inquiry, and as an area of interest to government policymakers.

In the US, recessions are highly correlated with two declining quarters of GDP. But the correlation is not perfect. There was clearly a recession in 2001, but we did not experience two consecutive negative quarters. There was clearly a boom in early 2022, but we did experience two negative quarters.

I suspect that many people are making the following logical fallacy:

We all know that recessions are traditionally associated with really bad labor markets (true). Thus past recessions have been important events (true). Recessions are almost always correlated with two negative quarters (true). Thus future cases of two negative quarters will be important events (false).

Here I’m dodging the question of whether two negative quarters are “actually a recession”, which is about as uninteresting a question as one could imagine. Who cares?

[Actually, I can think of an even dumber question: Is economics a science? Watch me move right along at the cocktail party when I hear that one.]

I’ll tell you who cares about recessions—dumb people who believe that words have magical powers. “If only I could convince you that this is a recession!” Yawn.

It’s not that I think you are wrong; it’s that I don’t care. Japan had a bunch of recessions in the 2010s. Do I care? No, none of them showed up in the labor market:

It’s incredibly uninteresting to see a slow growth economy alternate between slightly positive quarters and slightly negative quarters.

The entire world is now becoming more like Japan, with ever slower trend GDP growth rates. In the future, there’ll be lots more of these “recessions” with booming labor markets.

This is why the “Will there be a recession?” debate is so dumb. I don’t care whether the US experiences a recession; I’m simply not interested. The interesting question is whether the US will experience the sort of recession that we experienced in the past, where the unemployment rate always rose by at least 2 percentage points.

Now that’s an interesting question.

The German and Czechia recessions are so boring that the news media should not have wasted any ink reporting on these two events. No one cares.

PS. Another really dumb topic is “greedflation”. I’ve stopped even reading the articles. Josh Hendrickson brilliantly nails the underlying problem here:

This brings me inevitably back to so-called “greedflation.” This story is an attempt by people to treat every bout of inflation like isolated cases that require the fresh eyes of a new detective. 

It’s even worse. Lots of economists also think we need to treat every recession like isolated cases requiring detective work. It’s (almost always) the falling NGDP, stupid. (Covid in 2020 was the exception that proves the rule.)

PPS. BTW, US productivity and output growth was overstated in 2020 and is now being understated. The longer run figures are more accurate.

We’re not in Kansas any longer

In the old days, the threat of bonds being defaulted on made the bonds less attractive to investors. Now we live in the land of Oz, and default threats make investors rush to buy the bonds. Here’s Bloomberg:

The currency’s outperformance — steamrolling even the traditional safe-haven yen, which fell to six-month lows past 140 per dollar last week — reflects the US’s unique position at the center of the global financial system. Even when the nation is flirting with default, investors have little choice but to flock to dollar-denominated assets like Treasuries for protection. 

An MLIV Pulse survey earlier this month showed US debt was second only to gold as the most popular asset to buy in the event of a default.

In the old days, if a candidate was enmeshed in a scandal his rivals would rush to take advantage of the situation—criticizing his behavior. Now we live in the land of Oz, where rivals rush to defend the person they are running against when it is discovered that he committed sexual assault. Here’s Time magazine:

But when the time came to actually stand up to him, Trump’s primary rivals and political enablers were too cowardly or calculating to throw much of a punch. Nikki Haley, Trump’s major declared opponent and former U.N. Ambassador, dismissed the potential indictment on Fox News as “more about revenge than it is about justice.” Another active candidate, businessman Vivek Ramaswamy, went further, blasting the “disastrously politicized prosecution” and calling on other Republicans to condemn it. Former Vice President Mike Pence, who is openly considering a run, told an interviewer the probe “reeks of the kind of political prosecution we endured in the days of the Russia hoax.”

PS. This quote from Tyler Cowen explains why I completely ignored the debt ceiling “drama”:

There may yet be a final round of drama, but the people who treated this event as the nothing burger it is were on the right track the whole way through.

It’s the same everywhere

This Matt Yglesias tweet understates the similarities:

In Turkey, the liberals win both the prosperous coastal cities and the oppressed minority groups (the Kurds in the southeast.)

The authoritarian nationalist right wins the rest. That’s politics in the 21st century. Long gone are the days when non-minority working class voters supported the left.

(Within a few more election cycles, the Democrats are going to lose the Hispanic working class.)

Germany is in recession!!!

Back in August and September 2022, the German unemployment rate was only 5.5%. Then Germany plunged into recession. Here’s Bloomberg:

Germany suffered its first recession since the start of pandemic, extinguishing hopes that Europe’s top economy could escape such a fate after the war in Ukraine sent energy prices soaring.

First-quarter output shrank 0.3% from the previous three months following a 0.5% drop between October and December, the statistics office said Thursday. Its initial estimate, last month, was for stagnation.

As a result of this “recession”, the German unemployment rate has soared to 5.6%.

Perhaps this data sheds a bit of light on the point I was making in my previous post.

PS. If you prefer the other German unemployment measure (the harmonized unemployment rate), it’s fallen from 3.1% to 2.8% during the “recession”.

Boring recession calls

Over the past year, I’ve read one pundit after another offer a recession prediction. I’m not impressed.

It’s not that these predictions are necessarily incorrect—a recession might well occur in the near future. It’s that these predictions are useless. What am I supposed to do with the forecast? We already have market forecasts of a wide range of macro indicators.

History suggests that recessions occur every so often and are largely unforecastable. Economists as a group have failed to predict any recent US recession. Last year, lots of economists thought we’d be in a recession by now. Instead, we have the lowest unemployment rate since 1969. (But they also thought we had a “tight money policy” because interest rates were rising. Hmmm . . . please read my new book.)

I’d be much more interested in an unemployment rate forecast. The Fed currently expects the unemployment rate to rise to 4.6% by year end. It would take a recession for that to happen. But a recession could also lead to 7% unemployment, as in the relatively normal 1991 downturn. And yet a 4.6% unemployment rate is much closer to our current situation than it is to 7% unemployment. Simply saying “recession” tells me relatively little about what you expect to happen to the economy. What sort of recession?

Don’t get me wrong. I concede that the recession forecasts will eventually match reality. At some point we will have a recession. Until then, I wish pundits would just keep their mouths shut. I can see the fed funds futures market for myself. I don’t need anyone telling me what they think is likely to happen.