By David Berman
Are famously bearish observers beginning to shed their crankiness in the face of improving U.S. economic data? While we would hardly label the latest thoughts from John Hussman and Paul Krugman as warm and fuzzy, they have introduced the notion that things might not be as bad as they once thought.
In his weekly note to clients, Mr. Hussman said he could either continue to pound the table about recession risk and point to the fact that similar leading indicators have always led to recession; or, he could abandon that view because of recent improvements, including the big drop in weekly jobless claims. His solution?
“The interpretation best supported by the data is that recession risk remains very high based on the leading evidence and the typical outcomes that have resulted, but that the rate of deterioration has eased significantly, and it is simply unclear whether this is a temporary pause or a reversal,” he said.
“Rather than overstating the case one way or another, we remain strongly concerned about recession risk, but recognize the recent stabilization and the potential for a low-level continuation of that.”
In other words, a recession is no longer a certainty.
Okay, these are hardly bullish thoughts. But for anyone who has been following Mr. Hussman’s steady stream of dire warnings about the U.S. economy recently, this moderation does mark a pretty big shift. Just two weeks ago, he dismissed strong payrolls growth in December: Payrolls can rise meaningfully in the month prior to a recession.
Meanwhile, Mr. Krugman, who has previously warned about the threat of austerity measures on a weak economy, asks in his New York Times column whether the U.S. economy is healing.
His preamble is fairly typical Krugman: The state of the economy remains terrible and unemployment remains painfully high. But this column has a “but”: “But there are reasons to think that we’re finally on the (slow) road to better times.”
“Why am I letting a bit of optimism break through the clouds? Recent economic data have been a bit better, but we’ve already had several false dawns on that front. More important, there’s evidence that the two great problems at the root of our slump – the housing bust and excessive private debt – are finally easing.”
Home sales are improving, building confidence is rising and unemployment claims are falling. And just as the economy has been caught in a vicious cycle in recent years, where a depressed housing market has hurt the economy, which has further depressed the housing market, the chances of a virtuous cycle are now on the rise – if still years away.
Of course, big risks remain. In the case of Mr. Krugman, he points to the ongoing problems in Europe and the possibility that troubles there could derail the U.S. economy. For Mr. Hussman, those darned leading indicators continue to flash strong warning signs.
Now, when bearish voices turn bullish, some smug observers see the switch as a contrarian indicator that things are about to get bad. But does this apply when bearish voices happen to be really smart?