Krugman Is Wrong Again: Employment Is NOT A Lagging Indicator
This has been bothering me for at least 3 months and the earlier clip from Krugman and Charlie Rose angered me enough to write about it.
From the soylent green-shoot crowd, we are reminded daily that since employment is a lagging economic indicator, we ought not pay it much mind when examining the economy and its future prospects.
Hey Charlie Rose and Paul Krugman, Larry Kudlow and the rest of CNBC, guess freaking what? You're all wrong. And idiots to boot for not adjusting your models to reflect the current reality. And Krugman teaches witch-doctor economics at Princeton and has a Nobel Prize in Keynesian witch-doctoring, so he deserves the greatest criticism for being wrong.
Notwithstanding conventional wisdom, unemployment is not a lagging indicator in the current downturn. I've made the case before and Dr. John Hussman points out recently that in an environment of extremely high consumer debt and shaky mortgages, unemployment is a leading indicator, as job losses lead to more foreclosures and general debt delinquencies. The old rules do not apply.
In typical recessions, unemployment tends to be a lagging indicator, and the employment figures themselves tend to move up and down roughly in concert with the overall economy. In the current downturn, however, the unusually high debt burden and precariousness of mortgages among households creates a dynamic that we don't usually observe. In the current cycle, as Ray Dalio of Bridgewater has correctly (in my view) pointed out, unemployment is likely to be a leading indicator of the economy. In an overleveraged economy, job losses can be expected to be followed by further delinquencies and mortgage foreclosures. While I don't expect that this will cause a violent feedback loop, I do believe that it is glib to assume that the employment markets and the U.S. economy are on a one-way track to improvement.
KRUGMAN'S CLASSIC 'DEER IN THE HEADLIGHTS' LOOK
And for good measure, former Merrill Lynch chief strategist Richard Bernstein argues that components of unemployment, specifically average work week and jobless claims are always leading indicators, while payroll employment is a coincident indicator:
First, let’s set the record straight. Employment is NOT a lagging indicator. Some indicators of employment, like jobless claims and the length of the work week, are actually official leading indicators of the economy. Payroll employment is a coincident indicator.
Second, the monthly payroll report, like the one issued today, is full of largely coincident data. However, it does have one piece of leading data: the length of the work week. This is generally considered a leading indicator because employers will tend to adjust the number of hours their employees work before hiring or firing them. For example, it would be normal for companies to begin to pay existing workers overtime before they hire additional workers because of the uncertainty related to the initial upturn in a production or service cycle.
However, commentators rarely highlight the length of the work week when discussing the monthly employment report.
What has been happening to the length of the work week? It has hit all-time lows the last two months. That’s right. The only official leading indicator in the employment report has hit all-time lows the last two months. Who has reported that? No one.
Weekly jobless claims are also an official leading indicator, and they remain above 600,000 (why is that the magic number anyhow?). Thus, two leading indicators relating to employment seem quite weak.
Thank goodness for sane voices in a sea of rampant stupidity. And Krugman, take some time out from your media schedule to adjust your models for the new reality. And while you're doing so, add this mantra to your to-do list: recessions are NOT evil; they are a natural part of the economic cycle...stop trying to prevent them with uselss theory and generational rape. We have had enough.
The sane quotient of the economic blogoshere will unite to destroy you in your push for a 2nd stimulus. This is just the opening salvo from yours truly.
We are watching, we are keeping track, and we are not impressed.
Jul 8, 2009 at 11:08 PM
Reader Comments (5)
They must be stopped.
That's my dose of reality now you can go back to your fantasies.
That's my dose of reality now you can go back to your fantasies. "
Trillion-plus budget deficits ARE reality. The administration's 3-4% growth estimates in the near term are fantasies. What are you talking about? "We" -- those of us who oppose the bailouts and the runaway deficits -- also elected Obama. You don't really believe that this is only about D's and R's, do you?
I'm with James...I'm not sure I understand your comment...explain further.
My point in this article was very narrow...I had just grown tired of hearing that employment was a lagging indicator, when most of its components are leading indicators or in one case a 'co-incident' indicator.
The Catch-22. It's simple logic: to pay your bills you need a job, but to get a job you need to have a good credit record, but to have a good credit record you need to pay your bills.
It is only after this catch-22 situation is somehow overcomed that an employment index will begin to confirm a growing GDP.
Henry G. Delforn
Carpinteria, CA