Popular Economics Weekly

“Irrational Exuberance” author Robert Shiller in an eye-opening Sunday New York Times op-ed maintains there is still chance of a double-dip recession. But it could happen over years, rather than months. “I use the definition of a double-dip recession that doesn’t emphasize the short term,” he says. “I see it as beginning with a recession in which unemployment rises to a high level and then falls at a disappointingly slow rate.”

The problem with such a definition is that only the Great Depression fits his description. The double-dip occurred in 1937, 4 years after the 1929-1933 depression, when President Roosevelt prematurely attempted to balance his budget! So is Professor Shiller guilty of his own irrational pessimism?

There is little likelihood of a double-dip for several reasons. Hiring is picking up in the wake of record corporate profits over the past 2 quarters, the huge amount of government stimulus spending—some $3 trillion plus is just now taking effect and, confidence levels are not falling in spite of the current stock market correction.

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Corporate profits in the fourth quarter surged to an annualized $1.270 trillion from $1.174 trillion the prior quarter, as we reported last week. Profits in the fourth quarter were up an annualized 37.0 percent, following a 68.0 percent jump the prior quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are up 51.8 percent on a year-on-year basis.

This is the major reason stocks have recovered. The New York Times’ Paul Lim says there are rising expectations for corporate profits among Wall Street analysts (i.e., their ‘animal spirits’ are rising, not falling). So based on their 2010 earnings estimate, the ‘forward’ price-to-earnings ratio of the S&P 500 has slipped to 13.7 percent from 15.3 percent less than one month ago. And Dr. Shiller maintains in Irrational Exuberance a price-to-earnings ratio of 13-14 percent increases the odds 10-15 percentage points that stock prices will increase rather than decrease.

It is true unemployment has remained high compared to past recessions, as we said last week. But payroll jobs in April grew a healthy 290,000, following a revised 230,000 advance in March, and 39,000 rise in February.  And net combined revisions for March and February were up a 121,000—including turning February from negative to positive.  Do we have to repeat the fact that payrolls have risen for four consecutive months and in five of the last six?  April’s boost was the largest in four years, by the way. 

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It’s hard to argue that we are still in recession with this string of gains, as we have said, even though the gains are mostly on Wall Street to date, with corporate profits soaring. Of course consumers don’t yet feel they are sharing in it, which is the basis for Shiller’s pessimism.

“From 2007 to 2009, there was widespread concern about the risk of an economic depression, but that scare has been abating”, he continues. “Since mid-2009, it has been replaced by the milder worry of a double-dip recession, as a count of Web searches for those terms on Google Insights suggests. And with that depression scare still fresh in our minds, sensitivity to the possibility of another downturn remains high.”

Yet the Conference Board’s consumer confidence index rose strongly for a second straight month, up about 5-1/2 points in April to 57.9. The gain is centered in expectations which jumped 7 points to 77.4, reflecting rising optimism over the outlook for business conditions and easing pessimism on the outlook for employment and income.

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The assessment of the present situation also improved with the index rising more than 3-1/2 points but to a still severely depressed level of 28.6, reports Econoday. Pessimism is easing with fewer describing current business conditions as bad and fewer describing jobs as hard to get (45.0 percent vs. March’s 46.3 percent). Other details show a jump in buying plans for cars and major appliances though buying plans for homes are still under water. Inflation expectations, despite the month’s rise in gasoline prices, eased slightly.

So the recovery is finally beginning for Main Street. I like Calculated Risk’s chart on this. According to the Labor Department’s JOLT report (Job Openings and Labor Turnover Summary), there were 4.242 million hires in March (Seasonally Adjusted), and 4.016 million total separations, or 226 thousand net jobs gained. Notice that total job separations have been dropping since January ‘09, while the number of both job openings and hires has been rising since mid-2009, the probable end of this recession.

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That is, even though the unemployment rate is declining slowly, it is already a long term trend, folks. And though the median duration of unemployment rose to 21.6 weeks from 20.0 weeks in March and the percentage of unemployed, marginally attached and part time is still above 16 percent of the workforce, it is mainly because more people are optimistic about finding a job (805,000 actually rejoined the workforce in April).

It’s true that short-term attitudes can change on a dime, as the DOW’s 900 point drop proves. But the longer term trend of “public thinking”, as Shiller calls it, seems to be greater optimism rather than pessimism. Just look at comparisons to other post-WWII recessions done by Calculated risk. It shows that the two longest jobless recoveries were during Republican administrations—Bush I &II—which were ruled by an ideology that opposed government stimulus spending. The Obama Administration has taken the opposite attack—pump as much government stimulus as possible into the economy to speed up the recovery. And it seems to be working.

Harlan Green © 2010