AT last week's Minyans In the Mountains confab, there was one question that I never got around to asking. Sadly the macro panel was far to short to allow it.

So here it is, and I welcome all comments:

In a recent discussion I attended, Ed Leamer of the UCLA Anderson Forecast expressed his belief that we are headed to a slowdown, but not a recession. His argument, in brief, is as follows:

1. Recessions have historically been driven by drops in consumer discretionary spending (the last recession, which was prompted by a drop in business spending, was the unique outlier). This spending falls primarily into two areas: Housing and Consumer Durables, as other areas are by their nature far less discretionary.
2. The leading indicator has historically been housing transactions (but not necessarily prices, which trail). This slowdown has a significant multiplier effect as brokers, lenders, mortgage brokers, construction workers, etc. are laid off.
3. Falloffs in consumer durables purchases and manufacturing follow, with a similar multiplier effect.
4. In the absence of a capital spending bubble like the one in the 1990s, there are no other sectors of the economy that are big enough or discretionary enough to prompt a recession.
5. BUT THIS TIME IT’S DIFFERENT: The vast bulk of consumer durables manufacturing has been exported. The jobs lost in that area in the last recession never came back. By exporting those jobs, we also exported much of the multiplier effect that goes along with a consumer durables spending slowdown.
6. Thus, his feeling is that we could have a significant slowdown led by housing, but that a recession is unlikely because the multiplier effect related to the consumer durables component is no longer inside the US. His view seems to fit well with Tony Dwyer’s thesis that our economy has structurally changed since 1982.

The question I’ve asked, and to which I’ve gotten no convincing answer, is what else has changed that is not accounted for in his model? Obviously, exporting manufacturing jobs means that a reduction in manufacturing will hurt less at home. But what’s the greater impact to us buying less durables from China? What’s the impact of an “exported” recession in China? How do those feed back into our own economy? And what potential interplay is there between the remaining (and new) sectors of our own economy, some of which may have grown to a prominence they did not formerly have as our manufacturing base went away, and which may no play a far greater role in the economic cycle than they did in the past?

In short, while I have a great deal of respect for Ed Leamer and the Anderson Forecast (they’ve been too right, too often for too long to ignore), I find his reasoning on this to be far too linear, and to presume that far too many things remain the same, while only one factor has changed. I suspect the reality is far more complex.

-btc