March 28, 2023

Reminder: “Recession” Is Not the Same as “People Are Unhappy”

Reader Steve Kopits, after again asserting that VMT, gasoline usage, GDP all indicate economic downturn in H1 2022, composes as his clinching argument “And obviously, the public is none too enamored of macro indicators, either, offered recent polling heading into November.” I agree, the general public is not awfully pleased, as evidenced by say the U Michigan Sentiment indication. Thats not to say were in a recession.

As an additional observation, in truth, both are worse concurrent predictors of economic crisis than the 10yr-3mo term spread out with 12 month lag!!!! (utilizing McFadden R2 as metric). Of course, this would not appear to someone who is not able to understand what probit regression results ways

Unemployment has greater weight in the University of Michigan Sentiment index than y/y infation, according to regression coefficients, and scaled-by-standard-deviation (or “beta”) coefficients.
Both the torment index and the belief index are poor predictors of economic crisis 12 months ahead.

Figure 1: “Misery index” as sum of inflation and unemployment rate, in % (blue, left scale), and University of Michigan Consumer Sentiment index (brown, right INVERTED scale). NBER defined peak-to-trough economic crisis dates shaded gray. Source: BLS via FRED, Cleveland Fed, U.Mich., NBER, and authors estimations.
Certainly, sentiment declines throughout recessions, however it also decreases at other times, so that the match is not complete. Very same for the suffering index (what Arthur Okun called the “pain index”). Otherwise, specifically in regard to the sentiment index, we would be talking about the economic crisis of 2011. Keep in mind, the “misery index” has actually declined since June, while the belief index has actually increased since June.
Two observations (evaluating what I wrote in this post):.

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