by Calculated Risk on 8/18/2008 06:23:00 PM

Abstract from Professor Leamer: What's a Recession, Anyway?

Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.

Real Time Economics blog at the WSJ has more: UCLA Professor Says U.S. Is Still Far From Recession

Leamer is a very good forecaster, and his presentation at the Jackson Hole Symposium last year is an excellent read on how housing impacts the economy: Housing is the Business Cycle. Here is an excerpt:

The temporal ordering of the spending weakness is: residential investment, consumer durables, consumer nondurables and consumer services before the recession, and then, once the recession officially commences, business spending on the short-lived assets, equipment and software, and, last, business spending on the long-lived assets, offices and factories. The ordering in the recovery is exactly the same.

If we look at Professor Leamer's temporal road map for a recession, we are starting to see weakness in equipment and software investment (off 3.4% in the Q2 advance GDP report), and we can be very confident that investment in offices and other commercial real estate will decline in the 2nd half of 2008 and into 2009. This would argue that we are already in a recession.

Also, Leamer is correct that housing usually leads the economy both into and out of a recession. Housing busts usually look like a "V" with a sharp decline, and a sharp recovery. This time housing will probably look like an "L" shape with little recovery for some time (until the huge overhang of inventory is reduced). We are already seeing this in the NAHB confidence report released today. And we will probably see the same pattern for single family housing starts and new home sales. No quick recovery.

So once again I disagree with Dr. Leamer: I think the economy is already in a recession (not severe), however we agree that the period of economic weakness will probably linger.