While making clear that he’s not hoping for a recession, John Hussman still isn’t buying any of this nonsense about an economic recovery in the U.S. that has been gaining strength in recent months, making the following points in his weekly commentary about the data pundits have been using in support of their rosy outlooks:
Three basic issues are at play. One is that analysts aren’t making distinctions between leading, coincident and lagging data. The second issue is that there is little effort to measure the predictive strength of a given economic data point (or set of data points) in explaining subsequent movements in the economy. The third is that analysts seem to be forming expectations report-by-report (what I call a “stream of anecdotes” approach) instead of taking those reports in context of the full ensemble of data that is available at each point in time.
Let’s examine the seemingly most “compelling” data point first – the fact that December payrolls grew by 200,000. Surely that sort of number is inconsistent with an oncoming recession. Isn’t it? Well, examining the past 10 U.S. recessions, it turns out that payroll employment growth was positive in 8 of those 10 recessions in the very month that the recession began. These were not small numbers. The average payroll growth (scaled to the present labor force) translates to 200,000 new jobs in the month of the recession turn, and about 500,000 jobs during the preceding 3-month period. Indeed, of the 80% of these points that were positive, the average rate of payroll growth in the month of the turn was 0.20%, which presently translates to a payroll gain of 264,000 jobs.
Likewise, in 5 of the past 10 recessions, the ISM Purchasing Managers Index was greater than 50 just weeks before the recession began, and the new orders component of that index was greater than 50 in most cases, immediately prior to the recession. Very simply, neither a strong monthly employment gain nor a slight uptick in the PMI are informative signals that recession risk has eased.
As usual, there are some good charts in this piece along with an interesting discussion of the Conference Board’s Leading Economic Indicators.
Interestingly, with upwards of 70,000 job losses “baked into the cake” for the next labor report (due to poor seasonal adjustments in the “couriers and messengers” category as noted here and other data anomalies), a disappointing jobs report three-and-a-half weeks from now just might be enough to knock the wind out of consumers’ sails as they look over their credit card bills and regret having spent so much over the holidays (as noted here).