Recession call is premature

Significant attention has focused recently on the inverted yield curve. The yield curve for U.S. treasuries is said to invert when a short rate such as the three-month Treasury bill trades higher than the benchmark, the 10-year note.

Federal Reserve Bank of New York research “documents the empirical regularity” that the curve’s slope” is a reliable predictor of future real economic activity.”

Inversion has led to speculation that a U.S. recession is underway. But it is premature to make a recession call like our announcement about the last recession (Arkansas Economist Says Recession Is Here,” Talk Business, May 16, 2008) because coincident economic indicators continue to expand.

The latest evidence is Friday’s (Sept. 6) national payroll employment report from the U.S. Bureau of Labor Statistics. The BLS report shows 130,000 jobs were added nationwide in August, extending a streak that extends to October 2010. Employment gains occur in economic expansions, not recessions.

Each month, more attention is usually lavished on the unemployment rate, currently at 3.7%. But the unemployment rate is a lagging indicator, not a good measure of the economy’s current status.

Payroll employment, by contrast, is one of four coincident, or real-time indicators followed by markets.  The others are real income less transfer payments, manufacturing and trade sales, and industrial production.

Following are excerpts from the NBER’s Business Cycle Dating Committee’s Dec. 1, 2008 announcement that a recession started in December 2007: “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators … series considered by the committee-including real personal income less transfer payments, real manufacturing and wholesale-retail trade sales, industrial production, and employment estimates based on the household survey-all reached peaks between November 2007 and June 2008.”

Employment is expanding. What about the other three coincident indicators? Federal Reserve data show real personal income less transfer payments has expanded in six of seven months this year.  Real manufacturing and trade industry sales are flat. But industrial production, which measures the physical output of the nation’s mines, factories and utilities has declined this year. Its decline suggests a manufacturing slowdown, not yet an economy-wide recession.

A final point: Gross Domestic Product measures the value of final goods and services. Some equate recession with two consecutive negative GDP quarters. Yet GDP increased in this year’s first two quarters, U.S. Bureau of Economic Analysis data shows. Positive GDP is synonymous with expansion, not recession.

Recent speculation is reminiscent of 1992 when partisans argued about economic conditions, though the NBER later revealed the U.S. economy had expanded since March 1991. A recession call is premature because the four coincident indicators have not contracted for at least one quarter. Despite this, it’s certain the economy’s status will remain the subject of much speculation into 2020.

The First Friday jobs report will be closely watched each month.

Editor’s note: Economist Greg Kaza is executive director of the Arkansas Policy Foundation, a think tank founded in 1995 in Little Rock. The opinions expressed are those of the author.