Wesbury: Data Show No Sign of Another Panic

Scott Burns: Talking dreaded double-dip recession.

Hi, there. I'm Scott Burns, Morningstar's Director of ETF Research coming to you live from Morningstar's ETF Invest 2011 Conference. Joining me today is First Trust Portfolio Advisors' Brian Wesbury, chief economist.

Brian, double-dip recession. Is it going to happen? Is it happening?

Brian Wesbury: I don't think so. If you look back over the past two years, the eight quarters up through the second quarter of 2011, the U.S. economy grew 2.4% at an average annual rate. Now, it slowed down to a little bit less than 1% in the first half. But if you are growing at 2.4%, sometimes you are going to be at 1%, sometimes you are going to be at 3.5%.

Remember, we had the tsunami; now, I am not making an excuse for this. The economy clearly was weak in the first half.

The question is, are we slipping off into another recession? Weak growth in and of itself is not proof that another recession is coming.

I think we've seen retail sales--in fact, our forecast for the third quarter already shows 2.5% to 3% growth. So, it looks like we are going to recover and head back up to our trend, which is roughly 2.5% right now.

Burns: So, when we look at, obviously, the massive economic slowdown that happened in the '07, '08, '09 period, we didn't really run out of that. We recovered, but it wasn't the slingshot that we normally see.

When you look at historical economic recession-to-recovery archetypes out there, what is this starting to look like? Is it looking like stagflation? Is it looking like Japan? Are we looking at something maybe a little more positive?

Wesbury: This is great question, Scott. I think this is one of the reasons why people expect a double dip. It was so bad in '08 and early '09 that they still haven't recovered from the shock. If you are driving down the highway and somebody almost hit you, 30 seconds later you are not normal. Now, you think everybody is going to hit you, at least for a little while.

So, we are still in that period. Can we have another panic?

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This is why we switch over and look at what I call--in these times when people are really worried about a panic--high-frequency economic data. That stuff that comes out every week, and we have hotel room occupancy, we have railcar loadings, we have steel production, we have two surveys on retail sales, we have initial unemployment claims, and my favorite is boxofficemojo.com. So, literary you can get box office receipts for movies last weekend, on Monday morning.

Burns: So, you are just looking at total movie attendance, or do you start to slice it by how many people went to chick flicks versus depressing stories versus inspiring sports movies.

Wesbury: (laughing) I am adding it all up and saying, hey, how much people are spending? All the receipts. And sometimes that matters--what's the number one movie?

But all of this data--so, from railcar loadings and steel production all the way to initial claims and movie box office receipts--there is no sign that we're panicking now. In late '08, all of this stuff fell off a cliff, but now, we're not seeing that. And so that tells me that we're not panicking.

However, that raises another question. Are we growing slowly today just because we had a financial crisis. If you believe Rogoff and Reinhart--it's a book that's written about all the last financial crisis that we've had over the last, I think, 200 years or something like that--and they say that we always grow slowly out of a financial crisis. I don't believe that. I can't refute every dot and tittle of their research, but what I believe is causing us to grow slowly today is the size of our government. Government spending has grown massively, and the bigger the government is, the smaller the private sector is, and less dynamic it is. That's why we have high unemployment.

Burns: How would you separate that historically? When I think about the financial crises that we've had, it almost always resolves itself with a bigger government.

Wesbury: Right. Yes, exactly. And that's why we grow slowly.

Burns: So, it's not causal, it's correlated actually.

Wesbury: That's right. I think what they found is a correlation. They didn't prove the causality. The reason economies tend to grow slow after financial crisis is exactly that, because governments overreact.

Now, there is one time in history where they didn't. In the early 1980s, remember we had Latin and South American countries go bankrupt, oil collapsed, ag collapsed as well, and in the savings and loan crisis, almost 3,000 banks failed in the 1980s and early 90s--and yet the economy boomed. And why? Well, we cut government spending, and Volcker raised interest rates, the exact opposite set of policies that we're doing today. So, ... the reason the economy has grown so slowly is because the government is so big. Having said that, I still don't believe we're going down into a double-dip.

Burns: Got it, got it. Now, one last thing: ...the economy is ever-present everyone's lives. So, for individual investors and advisors out there, you look at the data all the time. What do you tell folks when they come to you with their anecdotal stories about what's happening? How do you explain to them how to filter that anecdote? The plural of anecdote is not data. Someone told me that.

Wesbury: Right. That's exactly right. A very good line.

It's hard. It all depends on what the anecdote is. You hear a lot of times, "Well, I know guys that can't get loans. These small businesses can't get loans." And they base that on the fact that their brother-in-law wants to open a pizzeria in Brooklyn, and he can't get a loan. So, this gets personal, right. So, I say, does Brooklyn really need another pizzeria as your…

Burns: Is your brother's credit score 250?

Wesbury: Exactly. So it's very, very difficult. One of the things that Milton Friedman said is that what's true for one person is not true for society as a whole and that's one of the biggest mistakes that people make in economics. And I just try to remind them of that as gently as I can, because sometimes these anecdotal stories are just personal, and it almost feels like you're attacking them when you discount it.

Burns: Right. Well, Brian thanks for your insights on the dreaded double-dip. Maybe it will happen, maybe it won't.

And I think that's always a good advice to make sure that your perception does not cloud your view of what's happening in the rest of the world. So, thanks again for joining us.

With that, I am Scott Burns. Thanks for watching.