Blame it on the negative drumbeat

The idea that the US is in a terrible recession that may turn into a depression has spread like a malicious computer virus.

If you visited Google's news site and searched on the word "recession" last Friday, then you found about 44,000 items. Many of those, like the Time magazine story titled "Recession May Be Driving Off Illegals", began with the presumption that the gloom has already arrived.

There is no question that there have been many pieces of negative data, like the most recent report that revealed that the unemployment rate increased in May to 5.5 per cent. But many of the worst items tend to have a special story.

The jobs numbers, for example, according to Michael Darda, chief economist for MKM Partners in Greenwich, Connecticut, might have been inflated for a number of reasons, including technical problems associated with graduating students entering the labour force. And many other corners of the economy have offered positive surprises.

How mixed has the news been? There is a futures contract at Intrade that pays off if the US goes into recession in 2008. It currently suggests that the probability of recession is a tad more than 30 per cent.

Suppose that the Intrade future is wrong, and a recession began last December, as the media seems to believe. How would the current recession measure up to past slumps?

Annualised average GDP growth over the first two quarters of a typical post-war recession has been negative 0.9 per cent. The shallowest recession on record, in 2001, saw growth of 0.4 per cent over the first two quarters. The worst recession in the modern era was that of 1980, when the annualised growth rate was negative 3.4 per cent.

Positive growth

Over the past two quarters, the annualised growth rate was about 0.7 per cent, almost double the growth rate of the shallowest recession on record.

Consumption has been holding up as well. Annualised real consumption growth over the first two quarters of a post-war recession is 0.2 per cent. The maximum annualised growth rate over the first two quarters was 2.8 per cent, posted during the 1969-70 recession. The minimum growth rate over the same time frame was negative 4.7 per cent, which was posted during the recession of 1980.

The annualised growth rate over the past two quarters has been 0.8 per cent, not the best on record, but roughly four times higher than the typical post-World War II recession.

A pessimist might argue that the jobs data has been terrible this time, right?

Think again.

The average change in non-farm employment during the first six months of a post-war recession is negative 387,000. The maximum employment loss was slightly more than one million during the recession of 1948-49. In the recession of 1973-74, employment actually rose 690,000. That's a wacky number for a variety of reasons. If we exclude it from the calculations, then the average post-war recession began with a drop of 506,000 jobs.

The employment loss since December 2007 has been 324,000 jobs, way below that average.

Why has so much of the media accepted the deep recession story when the data is so mixed? The most plausible explanation is that many are motivated by political bias.

Economist John Lott and I studied thousands of economic news stories written over the past 30 years or so, and found that coverage tended to be far more negative when there was a Republican in the White House as there is now.

Finding answers

The bias has an easy explanation. Yale University economist Ray Fair has shown that a weak economy hurts the incumbent party. If a Democratic-leaning press can convince everyone that the economy is in recession, then it can influence the election.

Our analysis indicates that the treatment of the economy would be much different if there were a Democrat in the White House today. If so, then the headline of each bad piece of news would be, more accurately, "Economy Hovering Above Recession".

But instead of that, we get doom and gloom.

The politically motivated pessimism, like the computer virus, can have real consequences. While the economic data has been mediocre, consumer sentiment, as measured by the Conference Board, has been driven by the negative drumbeat to its lowest in 16 years. Negative sentiment might well slow spending enough to give us a textbook recession in the second half of the year.

But another possibility lurks behind the numbers. The Federal Reserve and Congress have delivered a tonne of economic stimulus, and that stimulus is set to juice up an economy that has been weak, but not terrible.

If everything goes according to plan, the economy will grow faster in the second half of the year, and a recession will have been avoided.

If we follow that path, then you can bet that the media won't admit it until November 5.