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Think recession fears are overblown? You need to read this

Anyone who is certain about the meaning of the August 5 positive job numbers in the US should consider similar certitudes from the 1970s. Maybe listen to real people

August 09, 2022 / 03:19 PM IST
Representative Image

Representative Image

The positive United States jobs report on August 5 — which far exceeded expectations — would seem to suggest that recession fears have been a bit overblown. At the very least, it adds yet another contradictory data point to a baffling collection of economic indicators.

Perhaps this means the US may avoid a recession for the foreseeable future. But be careful reading too much into a single data dump. Turning points in the business cycle are often defined by perplexing, contradictory data that can take many months to resolve.

Consider, for example, what happened nearly 50 years ago, as the US slid into a recession. No one at the time knew this with any certainty. Much like today, they fumbled around, trying to make sense of utterly confusing, contradictory signals generated by the paradoxical convergence of high inflation, a resilient job market and pervasive pessimism.

The fall of 1973 found the economics profession in the doghouse. The New York Times described how this reflected “the profession’s chagrin over its failure to foresee and diagnose the enormous inflationary explosion in food and commodity prices that blew up the price indexes in 1973.” The paper quoted economist Arthur Okun, who lamented “one of the greatest failures of economic analysis in modern times.”

Live and learn, right? In November 1973, economists in Richard Nixon’s administration confidently predicted that the country would dodge a recession. “Economists Believe Recession Avoidable,” the Atlanta Constitution triumphantly announced.

This was very good news — or would have been, had a recession not started that very month. But no one knew this at the time.

To be fair, not everyone was on the soft-landing train. Investors bailed out of the stock market at the year’s end, and many concluded that this augured a rough year ahead. Legendary economic commentator Leonard Silk noted that the stock market had “tumbled as though it were forecasting a major recession or even a depression.” Right on cue, nonfarm payrolls fell by 260,000.

But then the pessimists came up short. Factory orders for January 1974 shot up 5.4 percent from December. Surveys of manufacturers revealed a 13 percent planned increase in capital expenditures for the coming year. When President Nixon gave the State of the Union address, he confidently declared that “there will be no recession in the United States of America.”

It looked as if he was right. Not long afterward, nonfarm payrolls for February rose 175,000. Those job losses from the previous month? Only 105,000 workers were put out of work, not 260,000. Subsequent revisions ultimately nudged this number into positive territory.

Additional data offered yet more hope. After a brief hiccup in job creation over the winter, the economy continued to add new positions, particularly in areas unaffected by rising oil prices. In March 1974, Alan Greenspan, then heading an economic consulting firm, gave a speech in which he declared that “the end of the recession, if there ever was one, is close at hand.”

Ordinary people weren’t convinced. The University of Michigan consumer survey from March registered the most pessimistic readings in a quarter century. The survey economists noted “very many” of the respondents “believed that a recession was already here.” Which was entirely accurate, given that one had been in place for four months.

Very Important People were having none of it. Herbert Stein, who chaired the President’s Council of Economic Advisers, celebrated the “underlying strength” of the economy in March. In April, prominent economist Paul McCracken delivered an address at a conference on forecasting that described a recession as “unlikely”. The following month, US Federal Reserve Chairman Arthur Burns added: “I don’t like recessions and don’t believe it will happen.”

But by this point, some analysts couldn’t help but wonder if ordinary Americans might be on to something. By July — the eighth month of the recession — Citibank’s economists speculated that the country might well be in the midst of a “pervasive recession”. But this was still too extreme a view for many, with a number of economists preferring the language of a “slowdown” or a new oxymoron: a “growth recession.”

As economists and policy makers struggled to make sense of contradictory data, the oracles at the National Bureau of Economic Research muddied the water further. Member Solomon Fabricant channelled Erwin Schrodinger and his half-dead, half-alive cat, declaring that if the recession was “real” it must have begun the previous November — but he simultaneously maintained it was “not yet a real recession.”

The paradox of job growth amid declining output and pervasive inflation resolved itself by the late summer of 1974, when government economists released revisions to earlier data that allowed a far sharper picture of what was happening. Data that had previously been cause for hope — low inventories, for example — were revealed as statistical mirages.

But even as late as July, the fact that the employment rate remained stubbornly low gave ammunition to the optimists. When new data released in July suggested that the unemployment rate would remain unchanged, the Washington Post reported that this gave hope the economy was “expanding again instead of slipping into recession.”

It had long ago slipped, as most people concluded by fall. It would remain in recession for another six months, during which the more familiar symptoms of a contraction, most notably job losses, made their appearance. 

The recession would only end in March 1975. But the end, like the beginning, was not fully understood at the time. A month after the recession would eventually be understood to have ended, Greenspan, who had become President Gerald Ford’s economic adviser, remained pessimistic. “Greenspan Sees Recession Continuing,” the New York Times declared.

He was hardly alone: Other economists and forecasters put the end of the recession in the fall of 1975, with some arguing that the downturn might well continue into 1976, even though subsequent study would reveal that the economy was already recovering.

The economy of 2022 is quite different from the one in place in the twilight of the Nixon administration. But reliving the confusion of that earlier era is instructive. Any recession or recovery is often attended by confusing, even contradictory data. Put unforeseen inflation, sour sentiment and unexpectedly strong job growth into the mix, and things get messy.

All of those conditions are present now. That doesn’t mean we’re headed for a recession — or even in one now. But it does mean that anyone who speaks with certainty about where the economy is headed at such a moment should tread very gingerly. Here be dragons.


Stephen Mihm, a professor of history at the University of Georgia, is co-author of ‘Crisis Economics: A Crash Course in the Future of Finance’.

Views are personal, and do not represent the stand of this publication.
Stephen Mihm , a professor of history at the University of Georgia, is a contributor to Bloomberg Opinion.
first published: Aug 9, 2022 03:18 pm