Theory and practice

[unixronin]

According to Donald Luskin of Trend Macrolytics, writing in SmartMoney, Robert J. Gordon, “an acclaimed macroeconomist and professor at Northwestern University”, says the recession is over.  He cites as evidence for this that there appears to have been a peak on jobless claims, and asserts that “in every recession since 1974, the peak in jobless claims came within weeks of the bottom of the recession.”

One notices, however, that this excludes the 1970-71 recession, which had a double peak.  And in the 1980 recession, the peak of jobless claims came slightly before halfway through the recession.

But there’s another problem with this theory.  In this graph, the best example of it comes in the 1982-83 recession, where the jobless rate peaked, then dipped ... then rose again to higher levels, and peaked, and dipped ... then rose again to still higher levels.  At neither of those two interim dips — or even after the third peak — would it have been possible to say with certainty that the jobless rate had hit its highest point and was now headed monotonically back down.

So why does Professor Gordon think he can predict that now?  Yes, the jobless rate has dipped.  Unless he has a crystal ball or a time machine, he can have no way of telling whether it will rise again.  He could be right, and it would be nice if he’s right.  But at the moment, it’s a premature judgement.  Time will tell whether he’s right or wrong.

Comments

[unixronin.livejournal.com]

I can see you're about as impressed with his reasoning and rigor as I was. ;)

In addition to all the above, not until this is over will we know for sure when the recession actually ends and where the highest peak of new unemployment starts is. You can't correlate events meaningfully when you don't know whether they've occurred yet. As ithildae pointed out, economists have correctly predicted nine of the last five recessions. Predictive economics is not a mature science, and if there's one thing US economic history has shown us, it's that economists and financial analysts don't fully understand the problem yet.