Richard Nixon really did not like even the idea of recession. In one sense, you can’t fault the guy since he was constantly blamed for them. This was a relatively new idea, too, that somehow Presidents are responsible for economic circumstances across the country. Earlier generations wouldn’t have just scoffed at the idea, they’d have known it was pitifully stupid.
Even so, Tricky Dick made the economy his by the ill-fated wage and price controls of August 1971. People today remember that month for all the wrong reasons, the closing of the gold era which at that time was only being made official. Ending convertibility was an afterthought made so by the rampaging eurodollar’s very real printing press.
Nixon’s true aim was to get control of inflation by fiat, and I don’t mean government currency. He issued Executive Order 11615 pursuant to the Economic Stabilization Act of 1970 which imposed a 90-day freeze on prices and wage increases, if you can believe it. Those were just the start of the draconian nonsense.
The recovery from the 1969-70 recession was enough to see Richard through the 1972 election. The very next year, however, inflation was back in a big way. Consumer prices surged and then OPEC made economic life even more miserable with the October ’73 embargo.
What followed was indeed a recession, though one which was not immediately recognizable. For much of 1974, ambiguity was everywhere behind seemingly every indication. Labor data was mostly positive during the first several months of the year (in modern estimates, payrolls didn’t even put up a negative month until August ’74) and though GDP fell sharply in Q1 it rebounded in Q2 as nominal expansion clipped double digits.
The fourth quarter of ’73, the one with the embargo and skyrocketing fuel costs, GDP shot up by 12.4% (again, modern estimates) which was enough even with surging prices to produce better than 3% real growth. Against that backdrop, Nixon went before Congress in January for his State of the Union in which the President spent quite a lot of time taking even more credit for the resilience of the economy.
“Overall, Americans are living more abundantly than ever before, today. More than 2 1/2 million new jobs were created in the past year alone. That is the biggest percentage increase in nearly 20 years. People are earning more. What they earn buys more, more than ever before in history. In the past 5 years, the average American's real spendable income--that is, what you really can buy with your income, even after allowing for taxes and inflation--has increased by 16 percent.”
When you put it like that, fifty years later the US is wildly underperforming the first half of the Great Inflation.
President Nixon even had a message for the naysayers, the doom and gloom crowd that seemed to have followed him around for decades by then (he wasn’t actually wrong about that much).
“Despite this record of achievement, as we turn to the year ahead we hear once again the familiar voice of the perennial prophets of gloom telling us now that because of the need to fight inflation, because of the energy shortage, America may be headed for a recession.”
If it wasn’t for Watergate and his upcoming resignation, what Nixon said next might really have dogged him for the rest of his days, very much the same way “read my lips” clung to George H. W. Bush some years later. Speaking right to the American people, the President declared, “There will be no recession in the United States of America.”
According to the NBER, if only later on, the recession had already begun by the time Nixon’s speech was even written. But that group of Economists typically takes an extraordinary long time to make any determination. Indeed, by the end of 1974 they still hadn’t rendered a judgement.
Economist Julius Shiskin wrote for The New York Times in December ’74, “According to a recent Louis Harris poll, 65 per cent of the people in the United States think the country is now in a recession. Administration officials have acknowledged that we are in a recession, and most economists and newspaper correspondents now take it for granted.” Yet, Shiskin continued, no NBER determination was forthcoming.
Instead, he quoted Geoffrey H. Moore, the NBER’s director of business cycle studies, who ploddingly confessed, “Until the contradictions in the data run their course, I don't think we're able to say we are in a recession.”
That’s the thing - one big thing, anyway – about recessions. The economic data is always ambiguous during them…until it isn’t. By the time the numbers are uniformly terrible it’s already too late and more likely than not the downturn is already almost over with.
Not satisfied with this state of Economics, in August 1974 Shiskin had previously taken to The New York Times having proposed a few simple guidelines. His reasoning was sound and even noble, wishing that politicians might not be rushed into making hasty too often harmful decisions having fooled themselves with their own optimistic biases – as Nixon would – in the absence of any useful standards and definitions.
At the time, Julius Shiskin had been a Commissioner at the Bureau of Labor Statistics, the agency which kept and keeps track of the Consumer Price Index along with the “official” government employment data. The outlines he proposed included just three parameters: 1. Duration: Exceeds nine months as measured by a decline in nonfarm payrolls; 2. Depth: At least a 1.5% drop in GNP which extends two quarters and also produces a rise in the unemployment rate above 6%; 3. Diffusion: Three-quarters of all industries must see rising joblessness also lasting six months or longer.
We all know the second one, or part of it, only too well today. The “technical definition” of recession has been recited repeatedly every time quarterly GNP back then or GDP these days is pressed within reach of a possible negative number. Even Shiskin would tell you it isn’t so easy even if his main contribution was in an attempt to simplify judgement to a great extent.
Thus, when US GDP declined over two consecutive quarters throughout the first half of 2022, the term “technical recession” quickly came to be ubiquitous for often insincere or self-serving and political reasons. Instead, it was far more likely (as even I said at the time) the half-year of negative GDP was simply the beginning of a slowing down process.
Where and how it would end, that was and remains the important bit.
Most if not all Economists and especially central bankers agreed. Many if not most pointed out GDP’s twin for confirmation: GDI. Though GDI is meant to be nothing more than the other side of GDP, there are times when the two series do diverge at least in the short run.
Whereas a technical recession had developed according to GDP, from GDI the US economy was still moderately positive (though, I need to point out, subsequent revisions have shown GDI was down fractionally from the end of 2021 to the end of June 2022). As such, prominent experts confidently stated there was nothing to the yield curve inversion which showed up in March 2022 given the direction of GDI.
One of those, Joel Prakken, Chief U.S. Economist at S&P Global Market Intelligence, was quoted in August 2022 as saying, “Scholarly research suggests that when these two measures differ by a lot, eventually it’s GDP that gets revised in the direction of GDI and not the other way around.”
We better hope that’s not the case now.
If so, then the US economy is likely in a recession right now, maybe even a sharp one. And if Prakken was right then about which output measure to depend on, we’re in real rough shape.
GDI ended up just a tiny bit negative for the entire first half of 2022, then rebounded rather sharply in last year’s third quarter by nearly a 3% annual rate. Since then, however, it has been seriously downhill.
Q4 erased Q3’s gain and then some followed by a nearly 2% additional drop in Q1 this year. According to just-released estimates from the BEA, where GDP has been pretty stable during this period including the second quarter growing at around a 2% annual rate, GDI rebounded only by 0.5% in Q2 following those large declines.
The current divergence between GDP and GDI makes last year’s into a rounding error. Furthermore, as Prakken alluded to, history has repeatedly shown GDI is the far superior cyclical indicator and more than that GDP will far more likely end up being revised closer to it than not.
It is very nearly an identical case to 2007 and early 2008. During the third quarter of 2007, that critical three-month stretch, GDP appeared healthy in it as well as the next quarter, the fourth, rising better than 2.4% in each. GDI, on the other hand, that one fell sharply in Q3 ’07, more than a 3% annual rate, followed by a flat reading in Q1 ’08 then two more smaller negatives in a row. By the time Lehman happened, GDI was deep in contraction whereas GDP was near steady.
GDI had warned George W. Bush he shouldn’t forecast a soft landing as everyone else would – especially as the Federal Reserve then federal government came to respond to the “financial” crisis and concerns about economic contraction. The income side of GDP had already cautioned it was too late.
As you can probably imagine, unlike the middle months of 2022 there hasn’t been much public talk about GDI in the summer of 2023. Jay Powell’s silence this year in contrast to last year speaks volumes. This doesn’t mean there haven’t been private discussions, however. In fact, one among a few policymakers appears in the minutes for the June 2023 meeting, the one immediately following the previous GDP/GDI release for Q1.
“In their discussion of economic activity, several participants pointed out that recent GDP readings had been stronger than expected earlier in the year, while gross domestic income (GDI) readings had been weak. Of those who noted the discrepancy between GDP and GDI, most suggested that economic momentum may not be as strong as indicated by the GDP readings. In discussing that possibility, a couple of these participants also cited the recent subdued growth in aggregate hours worked.”
If you go by GDP and the headline payroll numbers, the economy looks soft yet resilient, hanging in there after 2022’s “technical recession.” Should you instead judge by GDI together with some of the other labor stats, and hours is a very good cyclical indicator, too, then you might consider, as the world’s bond markets have, recession needs no technical introduction.
These things remain ambiguous right up until suddenly they aren’t. Market curves have remained remarkably consistent throughout as to which way the vast majority of the global system is betting.
Nixon forecast a soft landing in 1974 when the recession had already started. George W. Bush did the same throughout much of 2008. Joe Biden has been no different both in 2022 and even more strenuously in 2023. This isn’t about Presidents and politics nor is it really about data. The truth is, soft landings like technical recessions are made up. But where the latter can happen in at least GDP numbers, soft landings never do in either the statistics or actual economy.
