I think of my friend Danny Blanchflower in four ways: (1) Dartmouth Professor of Economics with special focus on labor force analysis, (2) former monetary policymaker at the Bank of England, (3) Fellow in the GIC College of Central Bankers, (4) fishing enthusiast with special application directed toward snook on the Southwest Coast of Florida. When it comes to number 4, Danny has had a terrific season, and the snook now recognize him as he releases them from the boat.
Here are his official credentials at Dartmouth: https://economics.dartmouth.edu/people/david-graham-blanchflower.
Danny recently published a thoughtful and concerning essay in Prospect magazine in the UK, titled “This data accurately predicts recessions, and it’s predicting one right now,” https://www.prospectmagazine.co.uk/economics-and-finance/this-data-accurately-predicts-recessions-and-its-predicting-one-right-now-economic-crash-financial-crisis.
Prospect has given us permission to share the first paragraphs.
History, it seems, does repeat itself. The Great War, an influenza pandemic and a financial crash which started in the Florida housing market all occurred over a 15-year period from 1914 through 1929. In 2008 we experienced a financial market crash that started in the Florida housing market, followed by Covid-19 in 2020 and then war on the European continent, 14 years later.
Despite the historical precedent from nearly a century earlier concerning what can happen following a housing crash, policymakers around the world missed the Great Recession in 2008. Mervyn King, then governor of the Bank of England, was asked a few days before the failure of Lehman Brothers in September 2008 what he thought was going to happen to unemployment. He replied: “I do not think we really know what will happen to unemployment. At least, the Almighty has not vouchsafed to me the path of unemployment data over the next year.” The unemployment rate would of course rocket upwards, and the subsequent austerity was a giant mistake, hurting ordinary people and producing years of slow growth.
We now know that the UK had entered recession five months before King’s remarks, in April 2008, but he had failed to spot it. He even claimed the UK economy had decoupled from the United States so what happened over there was irrelevant to the UK. This clearly wasn’t the case: when the giant US economy sneezes, the world catches a cold. Spotting a recession early—especially in the US—can help prevent policymakers making things worse, as they did after 2008.
All the signs are that another recession is on its way in 2022, yet policymakers have missed it again.
We thank Prospect for permission and invite readers to read the rest of the column. Readers can register to access the article.
After we spoke with Danny about his UK and US recession forecasts, he added additional concern for the entire euro area. He sent the spreadsheet of the European Commission’s monthly confidence indicator survey data (https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/business-and-consumer-surveys/download-business-and-consumer-survey-data/time-series_en). He notes that all of these indicators “have collapsed.”
The 12 confidence indicator survey questions address the following:
Financial situation over last 12 months
Financial situation over next 12 months
General economic situation over last 12 months
General economic situation over next 12 months
Price trends over last 12 months
Price trends over next 12 months
Unemployment expectations over next 12 months
Major purchases at present
Major purchases over next 12 months
Savings at present
Savings over next 12 months
Statement on financial situation of household
Danny notes that the three quarterly questions are also collapsing. Those quarterly questions address three measures:
Intention to buy a car within the next 12 months
Purchase or build a home within the next 12 months
Home improvements over the next 12 months
We don’t know what the June 30 numbers will be until July, but high-frequency early indications are that the collapse will continue.
In the US, the economy is slowing and may turn down at any time. My friend Philippa Dunne had this leading paragraph in her daily TLRwire report for April 15 (subscribe here to this highly recommended report):
The Bureau of Labor Statistics reported this morning that in March, employment increased significantly in 10 states, down from 27 in February, and was unchanged forty states and DC. In neither month did employment fall by a significant amount. However, our diffusion indexes, which measure breadth of hiring around the country, contracted overall, falling from 48 to 35, and by all sectors except finance, up 1 point to 28, and government, up 6 points to 27. Trade/transport/utilities fell 23 points to 28; leisure & hospitality, 11 points to 35; professional & business services, 8 points to 34; and manufacturing, 7 points to 31.
So we have a worldwide condition of central banks tightening policy and getting away from negative interest rate policies (NIRP) or zero interest rate policies (ZIRP). They are doing so into the face of a global inflation shock from war and an uneven Covid recovery. Neither of those causes is a monetary-induced inflation shock.
The Fed and other G7 central banks may be able to walk the tightrope of soft landing without a fall. But if they do, it will one of the rare occurrences in history. The Fed is trying to get to the “neutral rate” and really has difficulty guessing what it is under the conditions of war and Covid pandemic shock.
We now have a cash reserve in our US Equity ETF portfolio accounts.
David R. Kotok
Chairman & Chief Investment Officer
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