DID YOU HAPPEN to catch the Sunday New York Time Magazine story about economist Nouriel Roubini? He's about the closest thing to a rockstar that our dowdy profession has. He's a celeb right now because, for years he predicted the collapse of the U.S. housing boom. Never mind that he was wrong for years before he was finally right. He was indeed finally right, and for the financial media for whom Attention Deficit Disorder is a way of life that's enough. So Roubini is the man of the hour, flitting around the globe consulting with the world's central banks, quoted constantly in the media, and with a gushingly adulatory feature about him in last Sunday's New York Times Magazine, dramatically dubbing him "Dr. Doom."
He looks the part, too. Perfect. The photo of him in the Times shows him with an expression on his face that is both grim and worried, as though he were afraid that the real estate collapse he predicted were about to become literal, crushing him right there on the streets of New York. Whenever I've been on CNBC with him it's even worse. He's relentlessly downbeat, and humorless he gives off the aura of heartless menace of a villain on "24." The Times story says, "He rarely smiles, and when he does, his face... contorts into something more closely resembling a grimace."
As quoted in the Times, Roubini says, "We are in a recession, and denying it is nonsense." And it's not over. It's going to be the "worst since the Great Depression."
This seems to match the mood in the country right now. Polls show that the majority of Americans think we are in a recession. So Roubini is hailed, as a source in the Times article calls him, a "prophet."
But it's not that simple. If Roubini is a "prophet" because his long-standing recession call has finally come true, then there must be a lot of "prophets" out there. Polls have been showing since 2005 that either a majority or large plurality of Americans believe we are in a recession.
But we are not in a recession. Economic rockstar or not, I think Roubini is just plain wrong.
Roubini may be proven correct eventually, by waiting even longer for his broken clock to tell the right time by sheer coincidence. But he's no prophet. Or if he is, he's just like any other prophet shouting his prophecies and waiting for them to maybe come true , or maybe not come true.
The word "recession" has a specific meaning to economists who study the business cycle. Whether we are in a recession or not is therefore an objective matter of science, not opinion.
Many people think that the definition of "recession" is two consecutive quarters of negative real GDP growth. That's actually not true in fact, the 2001 recession doesn't meet that definition.
The official determination of recessions is made by a committee of the National Bureau of Economic Research. They have latitude to use their judgment in making the determination it's not exactly a formula but they are clear about what factors they consider, and how those factors have to behave to result in a determination.
Edward Leamer of the Anderson School of Management at UCLA has written a paper for NBER that comes as close as possible to literally defining "recession." He's come up with a very simple formula, using just three economic inputs, that almost perfectly matches NBER's official recession calls. Leamer's formula nails most official recessions literally perfectly. It misses by a month here and there. The only big miss was the recession that officially began in late 1973, which Leamer's formula has beginning in late 1974.
Leamer's formula considers the unemployment rate, the total number of non-farm payroll jobs, and industrial production. Or more specifically, it tracks changes over time in them. When jobs and industrial production decline beyond a certain threshold, and when unemployment rises above a certain threshold, then the formula identifies that a recession is underway. There's then a simple procedure to determine in exactly which month the recession began and ended.
Considering all the doom and gloom out there, and the adulation being heaped on Nouriel Roubini, Leamer's formula shows with absolute clarity that we are not in a recession now. In fact, we're not even close.
Leamer's formula looks for the unemployment rate to rise by more than eight tenths of one percent over the most recent six months. As of now, it's very close to that, at 76 one hundredths of one percent. But it's not there.
Leamer's formula looks for payroll jobs to decline by more than one percent, on an annualized basis, over six months. As of now, they've declined only six tenths of one percent.
Finally, Leamer's formula looks for industrial production to decline by more than six percent, on an annualized basis, over six months. As of now, it's a mile away it's declines only 1.3 percent.
If we're not in recession, and if we're not even close to going into recession, and at the same time the people who falsely say we are in recession are being hailed as prophets, then what does one do?
There's a formula for that even simpler than Leamer's: You buy some stocks.
With all the pessimism out there and with reality nowhere near as bad as the pessimistic majority seems to believe how can stocks not be a bargain?