So now I try
a second approach to recessions. While strong growth could cause resource scarcity, it is possible to measure that inadequacy of resources in terms of their costs.
I chose three typical measures of business costs and examined how they changed
before the seven recessions: worker earnings, the price of oil, and a broad
measure of business input costs known as the producer price index. To measure the buildup of the costs, I took a
five-quarter moving average. The table below shows the five-quarter percentage
change of each of these costs and adds a fourth column for the sum of them.
What can we
learn from this table?
First, the
largest number on the table is the 118.4% for the cost buildup total right
before the 1981-82 recession. While most of that came from oil prices, notice
that the 7.7% increase for earnings and the 14.3% for PPI are large numbers for those
categories over time. One could say that business costs were rising widely and
rapidly before that recession.
Only the
2001 recession comes close to the 1981-82 number with a score of 59.2%. The cost rise
before that recession was mostly the 53.7% increase in oil prices. The PPI was
barely budging (3.7%) and worker earnings were up only (1.8%).
The 1973-74
and 1979-80 recessions are widely known to be oil-induced recessions. But
the table does not show that. For one thing, right before both those recessions, earnings and the PPI were rising rapidly. Notice that oil does not appear to be
a contributing factor. But that is because of some strange things going on with
respect to timing. The 1973-74 recession was famous for the Nixon Wage and
Price Controls, which put ceilings on oil prices, among other things. Oil prices
and inflation generally soared, but only after the recession had already begun.
It took a while for energy prices to build again, but build they did, with the
biggest increases coming in 1980 and thereafter.
The 1990-91 and the 1969-70 recessions were preceded by little
business cost buildup.
That leaves the big momma recession of 2008-09, and there we see no buildups in cost except for maybe oil. But we know there was much more to that one with respect to housing and finance.
That leaves us thinking about when the next recession will come. If it comes in 2019 we see only rising oil prices as a main culprit. Our simple look at past recessions suggest that business costs can lead to recessions, but we see very little going on with earnings or the PPI before 2019.
Perhaps the recession will come from well-known risks like trade wars, global factors, or finance. But so far those factors are risks and not real trends. As far as I'm concerned, I see no recession in our near future.
That leaves the big momma recession of 2008-09, and there we see no buildups in cost except for maybe oil. But we know there was much more to that one with respect to housing and finance.
That leaves us thinking about when the next recession will come. If it comes in 2019 we see only rising oil prices as a main culprit. Our simple look at past recessions suggest that business costs can lead to recessions, but we see very little going on with earnings or the PPI before 2019.
Perhaps the recession will come from well-known risks like trade wars, global factors, or finance. But so far those factors are risks and not real trends. As far as I'm concerned, I see no recession in our near future.
Cost Pressures* |
||||
Recession
|
Earnings
|
Oil
|
PPI
|
Sum
|
1969/70
|
4.7
|
1.2
|
2.0
|
7.9
|
1973/74
|
7.4
|
1.0
|
4.2
|
12.6
|
1979/80
|
8.1
|
4.1
|
8.4
|
20.6
|
1981/82
|
7.7
|
96.4
|
14.3
|
118.4
|
1990/91
|
3.7
|
1.6
|
4.8
|
10.2
|
2001
|
3.7
|
53.7
|
1.8
|
59.2
|
2008/2009
|
3.9
|
12.8
|
4.3
|
21.0
|
2019/20
|
2.6
|
25.5
|
4.4
|
32.6
|
Average 4.2 11.4 3.7 19.3
* These percentages are for the five quarters before the beginningquarter of each recession
Dear LSD. For biz costs to precipitate recession biz’s inputs—raw materials and labor—need to increase. So far there is no evidence of costs of mining, metals, farming, construction, transportation, and energy increasing. Don’t think oil will be a problems due to beaucoup supply. Not much evidence of housing costs increasing either—dern millenials gotta git out’a their parents’ basements pretty soon. Low-level labor costs are increasing moderately but not enough to make J. Powell cough. So, the only thing I can hang my hat on that could trigger a recession is the cost of my hair dresser—just increased from $18 a pop to $21—a whopp’n 16.7% increase—way above the inflation rate—a drop-dead killer fer shure leading indicator!
ReplyDeleteYepper, likely a black swan event will be the recession raison d'être.
I didn't know Tuna's got haircuts. I am jealous. Since we agree there are no imminent usual suspects ready to cause a recession, why is the Fed so worried about a looming recession? Why do they want to lower interest rates when the unemployment rate is at one of the lowest levels in history? Something seems off here.
DeleteWhy ask, “Why?” ‘cuz POTUS got J. Powell betwixt a rock and hard hat. Fed stepped on its foot by raising rates last December—markets slumped—‘n it realized that wut it thought wuz good policy wuzn’t so good. It realized it doesn’t have an infallible killer krystal ball to achieve homeostasis betwixt its four mandate tools of discount rate, reserve requirements, open market operations, and interest on reserves. Congress might want to add two more tools: #1 stable and growing stock markets and #2 POTUS gratitude.
DeleteFed likely to lower rates and if that doesn’t satisfy POTUS it can say, “Hey, we did wut you wanted ‘n it didn’t work out so now you’re the bad guy.” Then Fed can return to independence hav’n learned that abiding political is not the #2 tool it needs.
Wut’s off? That maybe a Fed isn’t need but rather a successful biz guy sitt’n behind the Resolute desk.
The Fed cannot and should not say to Trump "we did what you wanted." Maybe that is true but the Fed was set up to be independent not just from Trump but from politics. Sadly Powell and his team have not learned that lesson and they are trying to be popular when they are supposed to be the adult in the room. A popular Central Bank always has been and always will be a failure. So sad to me that our leaders are so weak and misguided. One last thing. You cannot return to independence. Independence is all about credibility. Once you have been under the thumb of politics no one will believe you will ever become independent again. The ball game is over.
Delete