Central bankers: slow to acknowledge the start; quick to declare the end

by Rebecca Wilder

There is always an agenda when a central banker declares the recession is over – and Bernanke is no different. The following facts remain: US GDP contracted at a 1% annualized pace in the second quarter of 2009 (its fourth consecutive drop), industrial output grew just two consecutive months after declining every month (except one) since January 2008, employment is still falling, retail sales are improving somewhat, and real personal income has formed no discernible upward trend.

In that light, the most accurate description of Bernanke’s declaration is that he “thinks” the recession is over, rather than it “is” over. His strategic announcement plays on market expectations to the upside, just as announcing that the recession is underway would play on expectations to the downside.

Are central bankers generally more apt to declare the end of a recession sooner that the beginning? I bet that they are. Will an AB reader do a little investigative reporting to find the first time that Bernanke acknowledged the onset of the 07-09 recession? My money’s on 12/08, the date when the NBER declared it as such and a year after it began.

To his credit, much of Bernanke’s Brookings address was spent highlighting the weak recovery that is expected. Bernanke is brilliant and surrounds himself with likewise brilliant economists – but data is data; and he sees what I see, which is a murky bottom and expected positive growth.

The charts below illustrate the key monthly macroeconomic variables used by the National Bureau of Economic Research to date the recession peak and trough by month: real income (I use personal income through July), employment (through August), industrial production (through August), and wholesale-retail sales (through August).

George Cooper is on to something in his book “The Origin of Financial Crises” (highly recommended). He criticizes central banking for adhering to efficient markets thinking, which leads to lax policy on the upside of the business cycle, i.e., allowing aggregate demand to outpace underlying fundamentals, and overly aggressive policy on the way down.

In this light, central bankers might be quicker to face the end of the recession and slower to conclude the onset of one. It is akin to policy mistakes being made on the way up and a triumph on the way down.

Rebecca Wilder

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