Reader Steve Kopits, after again asserting that VMT, gasoline consumption, GDP all imply recession in H1 2022, writes as his clinching argument “And apparently, the public is none too enamored of macro indicators, either, given recent polling heading into November.” I agree the public is not terribly happy, as evidenced by say the U Michigan Sentiment indicator. But that’s not to say we’re in a recession.

Figure 1: “Misery index” as sum of inflation and unemployment rate, in % (blue, left scale), and University of Michigan Consumer Sentiment index (brown, right INVERTED scale). NBER defined peak-to-trough recession dates shaded gray. Source: BLS via FRED, Cleveland Fed, U.Mich., NBER, and author’s calculations.

Obviously, sentiment declines during recessions, but it also declines at other times, so that the match is not complete. Same for the misery index (what Arthur Okun called the “discomfort index”). Otherwise, especially in regard to the sentiment index, we would be talking about the recession of 2011. Note, the “misery index” has declined since June, while the sentiment index has risen since June.

Two observations (recapping what I wrote in this post):

• Unemployment has greater weight in the University of Michigan Sentiment index than y/y infation, according to regression coefficients, and scaled-by-standard-deviation (or “beta”) coefficients.
• Both the misery index and the sentiment index are lousy predictors of recession 12 months ahead.

As an additional observation, in fact, both are worse concurrent predictors of recession than the 10yr-3mo term spread with 12 month lag!!!! (using McFadden R2 as metric). Of course, this would not be apparent to somebody who is unable to comprehend what probit regression results means.

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