Sunday, March 24, 2019


The R-word has been bandied about a lot lately. Like a bus that gets behind schedule on its appointed route, a recession will eventually arrive. It might not come on time but it will surely come. And when it comes the nation will suffer. Not everyone suffers and not everyone suffers the same, but no one wants that bus to arrive. So the longer the interval from the last "bus", the more pronounced the wondering gets about the next recession's arrival.

This wondering translates into all sorts of behaviors. One of them is pressure on those who command macroeconomic policy. We want the Fed to reduce interest rates, and we want the government to tax less and spend more.

So today is a good day to provide some background about recessions. I went to Wikipedia and found some interesting data to start the conversation. None of this predicts when the bus will arrive. None of this guarantees that you won't have to stand on the bus. It is mostly just JD for thought.

We always thought of recess as a nice time. We could get out of our rigid school desks and run to the playground. A recess meant an interruption in the normal process of reading, writing, and arithmetic.

A recession is an economic term that means the normal progress of economic growth gets interrupted in a noticeable way. A recession refers to those times that are less desirable for the economy. In the United States, we let the Bureau of Economic Analysis decide when recessions begin and end. They use a lot of information. For example, when JD sales go up, there is probably a recession. Just kidding. The BEA looks at many economic indicators including real GDP growth, spending on consumer and industrial goods, capacity utilization, unemployment, and more.

Since the press is not good with complicated things, the media proclaim a recession if real GDP falls for two quarters. If half of a year is yucky, they proclaim a recession. 

So what do we know about recessions? (Some data is found in the table below.)

  • Since I was a prickly lad of 14, we have had eight recessions in the USA. In almost 60 years, we had eight recessions. That means we have a recession just about every 7.5 years. Since the last recession ended in 2009 and today is 2019, we have not had a recession in about 10 years. The bus is late.
  • The table shows the average time between recessions is 65 months. The 2000-01 recession was a very slow bus – it took 120 months to arrive. The 81-82 recession came only 12 months after the 1980 recession. So there is a lot of variability in when the next recession is coming.
  • The average recession lasted 12 months. The one in 1980 was half of the average, and we had two occasions when a recession lasted for 16 months. The last recession took 18 months.
  • During a recession, real GDP falls. The table shows the decline from the previous peak of real GDP to the lowest quarterly amount. The average decline in real GDP was about 2%. In the 2000-01, real GDP barely fell. In the Great Recession of 2007-09, real GDP fell by more than 5 percent.
  • Naturally, the unemployment rate rises in recessions. In the Great Recession and in the 81-82 recession, it rose to almost 11 percent. The average peak unemployment rate across all eight recessions was 8 percent.
Predicting recessions is a lot like predicting when the next hurricane is going to hit Sanibel Island – and then trying to guess where and how long it will hover and how much damage it will do. The next recession or hurricane will likely not be the average one and knowing if it will be short and sweet like 90-91 or long and deep like 2007-09 is not easy.

It is too bad that our economic models don’t do a better job of predicting recessions. But like hurricanes, it is a lot more complicated than it looks. I guess we will continue to muddle through and hope for the best. Over-preparation is no better than under-preparation. We should be careful not to throw out the baby with the bath water. 

Name Duration Time Since Peak Peak to 
Last  Un Trough
60/61 10 24 7.1 -1.6
69/70 11 106 6.1 -0.6
73/75 16 36 9 -3.2
1980 6 58 7.8 -2.2
81/82 16 12 10.8 -2.7
90/91 8 92 7.8 -1.4
2000/2001 8 120 6.3 -0.3
2007/2009 18 73 10.8 -5.1

Tuesday, March 19, 2019

Monetary Insanity

On Thursday March 14, Stephen Moore and Louis Woodhill wrote a piece in the Wall Street Journal called “The Fed is a Threat to Growth”.  I think Moore and Woodhill (M&W) are a threat to growth!

Here’s their story in a nutshell.
President Trump has restored growth to the US economy. Along with the growth, the inflation rate has been pretty much subdued. The Fed worried about inflation nevertheless, and this caused financial chaos as the Fed raised in interest rates. There was a collision of foreigners wanting more dollars while the Fed was removing them. Even though the Fed announced a halt to future interest rate increases, the damage to growth has been done and growth has not resumed. The Fed should lower interest rates now to get growth back on track.

Yikes…and Goldilocks lived happily ever after.

It all sounds pretty good but  does not pass scrutiny. JD always brings clarity to such things.

First, let's remember that the Fed’s mission was to restore some normalcy to interest rates. As a doddering old fool, I am among many Baby Boomers who live off interest. I guess M&W have their money invested in gold or bitcoin or something exotic, or they might have noticed how the spending power of all these people has been damaged through all these years of low rates. Just like Goldilocks wanted her porridge just right, the Fed needs to make interest rates just right. That means raising them. 

Second, the conclusion that the economy has been harmed and that the announcement to stop raising rates has not produced growth is silly. Do these guys think that growth just pops around every time the Fed talks about a policy? The markets might get hysterical for a day or two but come on. Growth hasn’t come back yet? Give it time. The world has not ended.

Third, why give so much blame to monetary policy for the lack of response of growth. Do these guys read the newspapers? The whole world is growing slower and it doesn’t have squat to do with our Fed. Clearly, China is slowing down and what is going on in Europe has little to do with Fed policy. It mostly has to do with expectations regarding a tariff war or economic problems in those parts of the world.

Fourth, is there no amount of money that will satisfy these guys? I’d like to remind them that banks are sitting on mounds of money in their excess reserves. Despite the moaning about high interest rates, interest rates are low. Interest rates are low because money is quite ample.

Finally, the markets don’t expect inflation now? Fine. Did they expect it 1961 when the inflation rate was less than 1%? Did they expect it in 1971 or in 1976? I don’t think so. Inflation has a very cunning way of jumping out at you like a black cat in the night. And it usually does that not long after "important economists" tell everyone that we need to flood the economy with lots of money.

Reducing interest rates right now is insanity, especially if insanity is defined as doing the wrong thing over and over despite the negative results.

Tuesday, March 12, 2019

Employment Hysteria

Employment rose by 20,000 jobs last February. You would have thought that JD had run out of corn. Without quoting any of the articles, the general tone of many of them was basically that this was a sure sign of a weakening economy.  The wise folks who predict monthly employment changes were devastated. They thought jobs would increase by hundreds of thousands. How could they be so wrong?

The answer is that predicting monthly employment much less monthly anything is like predicting how many pounds you will gain after one large juicy rib-eye at Malibu. I don't  know if a recession is coming or when but this last data point for employment tells me nothing. Nada. Zip. Zero.

To prove my point -- look at the two graphs I downloaded from my friend FRED at the St. Louis Fed. The first graph plots monthly employment for each month between January 2000 and February 2019. I did not do this with my Etch-a-Sketch. It is the real thing. Do you see a recession coming in that graph? Do you see a major employment problem? Do you see a Tuna with a miniskirt?

How about the graph below it? In that one I asked my buddy FRED to plot the annual growth rate of employment for each month since January of 2000. The point on the graph for February 2019 is the percentage change in employment from February 2018 to February 2019. Do you  see anything crazy in that graph? Basically the year over year changes for about the last five years have been pretty stable. Recession signal there? I don't see it.

What's with the press then? You already know the answer. They don't give a hoot about informing or educating you. They just want to sell you cars and trucks and a host of other doobers. They can't sell all that stuff unless they get your blood boiling. So sad.

Tuesday, March 5, 2019

A little Ditty about Jack and the S&P 500

I live in Bloomington where we often have sightings of John Mellencamp in the grocery store. Jack and Diane is one of his hits. Pardon me for messing with Jack and Diane to make some points about the stock market valuation today using the S&P 500.

As you know, I love looking at data as much as gazing upon a curvy bottle of Jack (Daniels). Stock market values have been quite volatile lately and have gotten a lot of attention. At the center of that attention was the previous very high value of the famous P/E ratio followed by recent stock values that are lower than the scum on a Tuna’s belly. While there is nothing wrong with P/Es and looking at today’s values of stocks, that focus misses a lot.

Suppose you heard that Nathan gained a bunch of weight. You might say, poor Nathan. He gained all that weight. He must be on the famous Brad diet featuring large Ribeye steaks and extra-large Guaymas shrimp. But then I tell you the rest of the story – Nathan previously lost 50 pounds when he mistakenly tried exercise for several weeks. My point is that large changes today are often preceded by opposite large changes of yesterday.

That caused me to search around on the Internet for historical values of the S&P 500. There I learned that the S&P on January 1, 2000 had a value of 1426.* I also learned that on January 1, 2018, it was 2790. In those 18 years, the S&P 500 value had almost doubled. Groovy. I took out my Casio fx-300ES and learned that the increase over those 18 years was about 4% per year. If you thought the stock market at the beginning of 2018 was over-valued, then I would say, yeah, but it only produced a 4% annual rate of growth over all those years.

Then I looked at more of the data. I found that after hitting 1426 in 2000, the S&P 500 never exceeded 1426 until 2013 (I was looking at monthly values of the S&P on the first day of each month). It came close to 1426 on January 1, 2007, but then the world fell apart. Wow. Basically zero growth in the S&P for 13 years!

I wondered what normal growth would have produced over those 13 years. Starting at 1426 in January 2000, if the market grew at an annual compounded rate of 4%, it would have hit 2375 by 2013. If it had grown at an annual compounded rate of 6%, it would have reached 3042 by January 1, 2013. In 2013, it was neither 2375 nor 3042 – it was stuck at the level reached in 2000!

Key point: With such horrible past performance, it does not seem crazy that the S&P 500 would recover after 2013. It does not seem weird that it would make up for more than a decade of lost growth. From a value of 1480 in 2013, it rose to 2790 in the next five years. Yes, that is a big increase. Yes, that is almost a doubling of the market. But if you consider the annual compounded rate between 2000 and 2018, it is less than 4% per year. If it had risen over those 18 years by a respectable 6% compounded annually, it would have reached 4070 by January 2018.

As I write today the market is closing in on 2800. Is that too high or too low? I don’t know. But I do know that markets go up and down. Surely today’s values are very high compared to the very low point after the last global recession. But they do not seem out of line when you take a longer view of 18 years.

* The data I used are monthly values on the first day of each month. If the S&P 500 had higher or lower values than on the first day during the month, then some of my comparisons might not be valid. I think the overall trends and conclusions are fine. The data came from