America has already slipped into a recession that could be as bad as the 2008 financial meltdown according to key consumer data, a Dartmouth College professor has warned.
David Blanchflower, of Dartmouth, and Alex Bryson, of University College London, say that every slump since the 1980s has been foreshadowed by 10-point drops in consumer indices from the Conference Board and University of Michigan.
The abstract of the Blanchflower/Bryson working paper says,
We show consumer expectations indices from both the Conference Board and the University of Michigan predict economic downturns up to 18 months in advance in the United States, both at national and at state-level. All the recessions since the 1980s have been predicted by at least 10 and sometimes many more point drops in these expectations indices. A single monthly rise of at least 0.3 percentage points in the unemployment rate also predicts recession, as does two consecutive months of employment rate declines. The economic situation in 2021 is exceptional, however, since unprecedented direct government intervention in the labor market through furlough-type arrangements has enabled employment rates to recover quickly from the huge downturn in 2020. However, downward movements in consumer expectations in the last six months suggest the economy in the United States is entering recession now (Autumn 2021) even though employment and wage growth figures suggest otherwise.
When I worked on forecasting, which was at the Fed almost 40 years ago, we thought that those consumer sentiment indices were too volatile to be useful in forecasting. Some possibilities:
1. We were stupid. We just did not understand that you could filter out volatility by looking just at large drops.
2. The consumer sentiment surveys were bad indicators in the 1970s and early 1980s, but they are better indicators now. Perhaps households have gotten better about sensing when firms are getting ready to initiate layoffs, so that their sentiment is now a good leading indicator. Perhaps the survey methods have improved.
3. The relationship that they found is mostly coincidental. Consider that “all the recessions since the 1980s” is not a particularly big sample. Since 1982, we’ve only had four. With so few observations, you cannot confirm that a statistical relationship is reliable.
My money is on (3). I wouldn’t call this work “research.” If you want to verify a statistical relationship that you will arrive at by trial and error, you need two samples of reasonable size. One sample is used to hunt for a relationship. The other sample is used to verify that you did not discover a coincidence. You can’t follow such a procedure with only the recessions since the 1980s to work from.
Blanchflower makes it sound as though their results imply a 100 percent probability that the U.S. economy is entering a recession. I think that the true probability is less than 25 percent.
I gotta think if wages keep going up, consumer sentiment will too.
Rents are killing the employee class. There needs to be free markets in residential construction, and wholesale de-zoning of property.
The whole C-19 scare is probably holding down sentiments too, but it will pass.
Go on zillow.
Find a place where zoning can’t be an explanation for recent housing surge.
Explain to me why zoning is the be all end all of high housing prices rather then the fed keeping the 30 year down.
Oh gosh, yahoo email. Only things more old school are aol or hotmail.
See Japan for low rates and low housing prices.
Also, apartment rents are exploding.
Supply and demand. Get rid of zoning and supply will explode to.
Free markets in residential construction would solve a world of ills.
I suspect that both rates and supply and demand play a role in explaining the recent rise in prices.
For example, over the past three years, the median price of a dwelling sold in the Indianapolis MSA has increased from $150K, to $220K. Prices have increased by 20% over the past year alone. I find it difficult to believe that Indianapolis lacks any material zoning constraints on greenfield development, and hence at the metro level there would be no material zoning constraints on housing supply. So other things have to explain the rise in prices in Indianapolis, and other similar metros.
LM-
Maybe so…but ask a local builder if he can buy land and build to meet market demand…or to meet city codes.
What fraction of Indianapolis is zoned R-1?
Interest rates have been low for years, and low forever in Japan…
An apartment in Sapporo rents for one-quarter one does for in Los Angeles.
As a result, people in Sapporo have higher living standards than in L.A.
And less crime.
The US is becoming dog doo-doo.
Well stated, Arnold. I found his piece strange and I think you put your finger on why.
I think it’s definitely wise to take any forecast in the COVID era with an even larger grain of salt than usual.
Suppose the correlation between consumer sentiment and demand was as they claim. In an era in which there is undersupply, and over 10 million unfilled jobs, a pull back in demand shouldn’t feel nearly as painful as a demand driven recession in normal times.
All of our significant Christmas gifts were purchased a month or so ago. We refuse to be victimized by Empty Shelves Joe. How’s that for consumer sentiment?
My new phone is sold out just hours after release. Blame empty shelves Joe!
Your generic flip phone already sold out? They can’t even keep the Nokias or similar knock-offs in stock? It’s actually worse than I thought. Let’s go Brandon!
Has every 10 point drop been followed by recession?
Were (2) to be true we would never see the train coming until we wondered why the indexes looked so much like the 1970s.
If we’re being honest, isn’t the exact point of saying we are “in a recession” kind of arbitrary?
At any given time, some People’s business is booming while others are in a recession. I get that we have to draw a line somewhere, but I’ve always thought careful study could probably pull apart different sub economies and find some correlations with greater specificity between economic flows and particular indicators