Saturday, August 7, 2010

Quick comment on double dips

The only time there has been a “double dip” NBER recession in the postwar period was in the 1980-1982 episode, and it was fully signaled by a secondary inversion of the yield curve.  The 1/10 yield curve inverts an average of about a year before NBER recessions begin.  Here is a 12-month smoothed 1/10 yield curve slope over the postwar period:


The unsmoothed yield curve did go positive in between the 1980 and 1981-1982 recessions, but only briefly; as Volcker applied more tight money after an election year acceleration of inflation.  The smoothed yield curve remained fully inverted.  (The only time the curve inverted and a technical recession did not occur was in 1966—but a drop in the GDP growth rate from ~8 percent to near zero did occur; a “growth recession” it was termed).

Today the yield curve is steeply sloped, so no double dip is indicated.  Why should the yield curve send such great signals?  That is beyond the scope of this note.  I don’t argue with 60 years of empirical regularity.  The yield curve was also inverted steeply in 1928-1929.

The quickest drop off of the smoothed slope from a level such as we’re at now over 3 was from 2004:6 to 2007:6, as the Fed raised short rates and deflation began its assault on the US economy and long rates.  Thus, if we match that decline rate, the curve might invert in mid-2013 and the next recession begin in mid-2014.

The unemployment story that goes along with this might go something like this:

Unemployment rate rises slightly for a few months, and then a determined effort is made to report declining unemployment rates, which, however, must remain within the realm of credibility with a populace (or least the marginally well informed part of which) has come to rely on the larger U6 unemployment rate measure and the employment-population ratio for indicators of labor market health.  This will prime “animal spirits” for the election year, after which all hell breaks loose.

Here’s the picture:


Now a run on the dollar or a failed Treasury auction might cause an inversion to occur quicker, but why would the Chinese do that?  They’re having their own bubble-popping problems.  However, the imperial temptation to drive the world into dollars by starting another war, probably in the Middle East, lingers always.  We probably won’t see unemployment rates under 8 percent for many years.  The best summation of the current labor market is Calculated Risk’s chart here.  Job growth has stalled.

Where will the demand for labor come from?  Americans are an adaptable people, and as they adapt to the “new normal,” business will chug on.  People may exit the measured labor force.  We will continue to be in an underemployment equilibrium because the income distribution is unequal enough that balanced demand is not possible.  Wage concessions to benefit wider employment will be made by Americans on the receiving end of the ruling elite’s diktats, and in this way a new social cohesion among the disenfranchised majority may grow, possibly into a democratic movement with the potential to forge a new social contract through the broken-down apparatus of the American government, or possibly into a new class of post-industrial serfs.


  1. Benign,
    With all due respect, we are very likely already in the second recession. Surely you've heard about the state of the ECRI Weekly Leading Index.
    Also very telling is the work of of the Consumer Metrics Institute,,
    whose Growth Index has a good track record for leading GDP.
    60 years of empirical regularity are of no great relevance when describing an event with no precedent. This isn't your dad's or granddad's recession. A debt burden like this has never existed before.

  2. When I say "underemployment equilibrium" that's econo-speak (that I occasionally fall into despite my better judgment) meaning "depressed economy."

    Why it's not a "recession" is that we are not experiencing an out-and-out collapse of confidence and sustained negative growth that is the hallmark of the NBER recessions (and the beginnings of depressions).

    When we have the next collapse of confidence in a few years we will fall further into depression, is my guess. It will be the biggest crisis since the American Revolution.

    I will bet you that the yield curve is not wrong this time, that this time is not different. We will see sluggish 1-2% growth until the next failure of "animal spirits" and negative growth.

    We can settle that bet in 2012, 2013 or 2014. What we have now is a depressed economy, far below potential output, carrying high unemployment, but we're not in an accelerating slump.

    It will be the unresolved debt burden that is a proximate cause of the next collapse.