Wednesday, October 07, 2009
Keith Hennessey yesterday on how the Obama Administration is changing its rhetoric about the recession on the basis of the second derivative rather than the first.
Check out the slightly different slopes of the three line segments indicated by arrows. The purple arrow shows a segment that slopes downward slightly less than the yellow arrow. A mathematician would say the shift from yellow to purple was an inflection point, shifting the curve from convex to concave.
This is what led the President in early August to say the economy was �pointed in the right direction.� The red arrow shows the worse news of last Friday�s jobs report, with a line that slopes downward slightly more sharply. The curve shifted back to a convex shape, in which the slope was more sharply downward than in the prior month.
If you�re saying to yourself, �That�s ridiculous! They�re all going down, and the differences in slopes are almost too hard to see!� then you�ve got my point.The line that represents how many people are working continues to decline. That�s what matters.
I thought we should look at the other three series of coincident indicators to see if any of them show an upturn that would fit Hennessey's point. Let's try first industrial production:
There are two up-months for July and August -- is that a trend or not? We should wait a little, but there's hope there. How about real retail sales?
There's a sharp spike in August, which might be Cash for Clunkers, but that series has wandered around for most of 2009. How about personal income?
I don't have a graph of this that pulls out the effect of transfer payments (like tax rebates), so this may not tell us as much, but I don't see much of a turnaround here either.
The NBER Business Cycle Dating Committee says that "domestic production and employment are the primary conceptual measures of economic activity' and that the payroll employment measure is the most reliable measure. Monthly GDP numbers are not yet available for August from Macro Advisers, but the July data (Excel) appear to be flat. I'm in agreement with Jim Hamilton that if this is a 'V' shape recovery, it's "tepid and potentially fragile" (though I don't put much on the possibility of a 'W' shaped recession at this time, in no small part because of Jim's blog partner Menzie Chinn's note on the latter periods of the Obama stimulus.) We even have noted bull Brian Wesbury saying "even a V-shaped recovery is not a smooth, perfect line." The sun will come out tomorrow, but first we have to get past the convex AND the concave, and start seeing a change in the first derivative; we need a certain move in GDP AND in employment before someone starts to think this economy is heading out of the woods.