Paul Krugman moved the markets yesterday. After Krugman made his bullish remarks about the economy, the markets, down about 1%, moved back up and finished flat for the day. Markets were still lifeless until 2 PM; the last time I checked before posting.
What Krugman actually said was "I would not be surprised if the official end of the US recession ends up being, in retrospect, dated sometime this summer ... Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing." When you think of it, this is not such a bullish comment. But coming from someone who, until recently, thought that the world would end and that government was not doing enough to help the economy, it was a surprise. Fair enough!
But he also said "almost surely unemployment will keep rising for a long time and there’s a lot of reason to think that the world economy is going to stay depressed for an extended period". How bullish is that? And unemployment reached 9.4% in May, its highest level in more than 25 years. Some people claim that it is bullish because more people are looking for work. And, as such, they swell the rank of the unemployed, making the unemployment rate jump. It may be true but the hard times may proove discouraging for those unemployed people who will be unsuccessful at finding a job in the comig months. As they stop looking for work and eventually exit the labor force, the number of unemployed will fall. By the same logic as above, will we then claim that the resulting fall in the unemployment rate is bearish? I bet you that the bullish crowd won't!
Yet, as recently as last month, Krugman said that the U.S. government fiscal stimulus was "only enough to mitigate the slump, not induce recovery." He recommended a much larger effort. He appears to have changed his mind. However, what he said a month ago is pretty much the same as what he said yesterday. To repeat it: "Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing." In other words, it's not getting better, it's just stabilizing! Krugman also admitted to be alarmed about the the Fed’s recent policy practices. "In the long run you really don’t want the central banks to be so involved in the business of lending". Even if deemed necessary for now he wondered "where does it stop?"
Let's look at what other experts are saying. The NBER said last week that it was too early to call for the end of the recession. Larry Meyer, the ex-Fed governor also foresees a long path to recovery. In an worthy article by Paul Vieira published yesterday in the National Post, Meyer - in Ottawa for the day - was quoted as saying that the recovery would be "historically weak". Moreover, Dominique Strauss-Kahn, the head of the IMF, said yesterday in Montreal that he did not expect a recovery until early next year. For a more detailed account of DSK's speech, please read the article in The Gazette by Jay Bryan who covered the event at the Conference of Montreal.
So who should we believe? The Paul Krugman of a month ago, the NBER, the boss of the IMF and Larry Meyer, an ex-Fed governor and a founder of Macroeeconomic Advisors (a long standing forecasting firm)? Or those who made up a story where there wasn't one?
My mind is made up! What about yours?