9 Out of 5 Again

More on declining stock markets around the world, and whether they may or may not be indicative of a recession. Do note that this sort of ambiguity is really useful to journalists because it gives them more to write about.

… Why pay attention to the financial indexes that, as the old joke goes, have predicted 9 out of the past 5 recessions? There are three possible reasons the market selloff could be cause for concern.

The first is that a recession is coming but has yet to show up in the data. The U.S. seems due: Its economic expansion is now the fourthlongest since World War II, and the stock market is a leading, albeit error-prone, recession indicator.

But hard economic data are not behaving as they would before a recession. …

Do keep in mind that recessions do not die of old age. This is one of those ideas that people keep trotting out and that macroeconomists are really tired of explaining just isn’t there in the data.

What about the rest of the world?

…

Surveys of purchasing managers from around the world compiled by J.P. Morgan Chase and Markit show that overall economic activity slowed a bit in December but to a level consistent with normal, long-term trend growth.

So, China’s not doing great, Brazil is in the dumps, but everyone else is muddling through OK.

The third and most plausible possibility is that markets are losing confidence in policy makers, driven in particular by events in China and the U.S.

…

“We collectively lost faith in ability of the Chinese authorities to always do the right thing,” says Angel Ubide, a former hedge-fund manager now at the Peterson Institute for InternationalEconomics. By contrast, the Federal Reserve is transparent and independent. The problem is markets disagree with its plans.

This is not a big factor for macroeconomists. We know that policymakers can influence economies, but that influence isn’t very big to begin with.

Read the whole thing. In the print version of the January 21 issue of The Wall Street Journal it’s entitled “The Selloff May Not Mean a Recession”.