How to tell if recession looms

What would economic race-calling be without its little excitements? As you may possibly have heard, this week's news is that the economy has contracted - shrunk, gone backwards - by 0.5 per cent.

Oh, no! Another negative quarter will see the economy lapse into "technical" recession. Technically true, but quite unlikely - as almost all the money market economists had the honesty to admit.

If you're more practical than technical, and you live in Sydney or Melbourne, the best way to judge whether recession looms is to look out the window.

Bearing in mind that anyone under 25 has never seen a severe recession, and that anyone under about 40 probably wasn't paying much attention in 1991, let me give you a hint: they don't look anything like what you see around you.

What the self-styled experts on "technical recessions" don't tell you - perhaps because they don't know - is that employment is falling and unemployment climbing rapidly during actual recessions and even before the "technical recession" is proclaimed by a slavering media.

Think about it: rapidly climbing unemployment is the main reason those of us who've lived through a few recessions don't toss the word around lightly.

So what do we know about the employment story in Sydney and Melbourne?

According to the Bureau of Statistics monthly survey of the labour force, over the year to October total employment in NSW rose by 39,000, while the rate of unemployment fell by 0.6 percentage points to 4.9 per cent (although this was fully offset by a fall in the rate of participation in the labour force).

Not all that wonderful, but a long way from the precursor to a recession.

As for Victoria, it's performance is pretty good: total employment up by 109,000 over the year to October, with the unemployment rate down 0.3 percentage points to 5.7 per cent, even while the participation rate rose by 0.9 percentage points.

If you live in Perth, however, looking out your window would convince you the West Australian economy is in something like a recession.

Over just the six months to October, employment has fallen by 19,000 (1.4 per cent) while the unemployment rate rose 0.7 points to 6.4 per cent and the participation rate fell by 0.9 points.

Get it? If we were in or near recession, you wouldn't need the technical brigade to tell you.

The other point is that most of the weakness in the nationwide figures comes from the very tough times in the 15 per cent of the national economy represented by WA - which, of course, is bearing the brunt of the massive fall-off in mining and natural gas construction activity.

NSW and Victoria aren't doing too badly.

But why the sudden sharp contraction in the national figures? The bureau's national accounts for the September quarter show that the 0.5 per cent contraction lowered the economy's annual rate of growth to 1.8 per cent, down from 3.1 per cent over the year to June.

Michael Blythe, chief economist for the Commonwealth Bank, offers the most enlightening metaphor, saying the economy had just hit a pothole.

Paul Bloxham, his opposite number at the HSBC Bank, says the fall reflected an (unusual) accumulation of various one-off factors.

"First, export growth was weak, as coal production was disrupted by a roof collapse at a key mine, and various other factors," he says.

"Second, residential construction fell in the quarter, which the statistics bureau noted was due to inclement weather.

"Third, there was a sharp fall in public investment spending, which followed a sharp rise in the June quarter.

"Finally, mining investment continued to fall as projects are being completed."

It's clear the first three of these are just temporary setbacks. "Export growth is expected to bounce back strongly in coming quarters, given that there is substantial capacity still to come on line in the resources sector, particularly liquid natural gas export facilities," Bloxham says.

Exports of services rose in the September quarter and are expected to continue to rise, supported by demand from Asia.

In home building, there's a substantial pipeline of work yet to be done on new apartment projects, which should keep housing construction growing in coming quarters, although this will come to an end after that.

The sharp fall in public investment is unlikely to be repeated next quarter. Capital spending by the public sector is, to be technical, "lumpy" - it jumps around from quarter to quarter. In this case the figures were distorted by the privatisation of a big asset.

This is the 12th quarter in a row that business investment spending has fallen because of the end of the mining construction boom.

Since December quarter 2012, mining investment's share of gross domestic product has fallen from its peak of 9.4 per cent to 3.4 per cent.

This says we can't be far from the bottom, which is good news. Bloxham says mining investment should level out - and thus stop making negative contributions to growth - around the middle of next year.

Anything's possible, but a second negative quarter seems unlikely.

Even so, when you look behind all the one-offs, you do see signs in these accounts that the economy may not be growing quite as strongly as we formerly thought.

Growth in consumer spending has been on the weak side for two quarters in a row, even though the bureau's latest stab at the household saving ratio (as a proportion of household disposable income) says it's down to 6.3 per cent, quite a bit lower than we thought. Low growth in wage rates is taking its toll.

In November, the Reserve Bank's forecast showed the economy continuing to grow by about 3 per cent next year, strengthening to about 3.5 per cent by the end of 2018.

My guess is, when we see the revised forecast in February, it will be down a bit on that, though not by a lot.

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Why I'm a pathological optimist, in spite of my job

Last week in front of 1400 people at a Fairfax Media subscriber event I was outed as a "pathological optimist" by an anonymous reader, who wanted to know how I got that way.

It reminded me of Dylan Thomas, who went into a pub in America and got beaten up by some big bruiser – a future Trump voter, no doubt – for calling him heterosexual.

But, since you ask, I'll tell you – much as I hate talking about myself.

I think it's partly heredity, and partly by choice. When you grow up in the Salvos, professing to be "saved", it's natural to be happy with life and confident Someone Upstairs will look after you.

My mother was an incessant worrier and I grew up seeing her worrying about a lot problems that never eventuated. My father wasn't a worrier. I decided to take after my dad.

In truth, as optimists go I'm out and proud.

I can only guess at what the future holds, but people are always asking for my prediction.

If you want a forecast that errs on the optimistic side, I'm your man. If you want death and destruction, feel free to take your business elsewhere.

Many people switch between economic optimism and pessimism depending on whether they approve of the present government. Not me.

Of course, if I thought we were staring recession in the face I'd say so. Even if I thought the possibility was a lot higher than normal I'd say so – though I'd keep the announcement sober rather than sensational.

Most of the time, however, the safest and most likely prediction is that next year will be much the same as this year. When it's a half full/half empty choice, you know which way I'll jump. (You know, too, that an economist is someone who thinks the glass is twice as big as it needs to be.)

What I said at that event last week was that I'm an optimist because "it's easier to get through life that way".

It's true. I commend it to you. And I have scientific proof. Professor Martin Seligman, of the University of Pennsylvania, a founder of the positive psychology school and author of Learned Optimism, has written that optimism and hope are quite well-understood, having been the object of thousands of empirical studies.

They "cause better resistance to depression when bad events strike, better performance at work, particularly in challenging jobs, and better physical health".

Other research has shown that individuals who profess pessimistic explanations for life events have poorer physical health, are prone to depression, have a less adequately functioning immune system and are more frequent users of medical and mental healthcare.

A study by Toshihiko Maruta and others at the Mayo Clinic, which followed almost 450 patients over 30 years, found that optimists lived longer than pessimists and reported better physical and mental health. Wellness is attitudinal, not just physical.

My conclusion is that optimists live happier lives than pessimists. But are optimists happier people or are happy people more optimistic? Bit of both, is my guess.

Which is not to say optimism is rational or realistic. It isn't. Seligman defines optimism as a style of explaining life events.

Pessimists think the bad things that happen to them are permanent ("the boss is a bastard") whereas optimists think they're temporary ("the boss is in a bad mood").

Pessimists think the good things that happen to them are temporary ("my lucky day") whereas optimists think they're permanent ("I'm always lucky").

Pessimists have universal explanations for their failures ("I'm repulsive") whereas optimists have specific explanations ("I'm repulsive to him").

But don't knock self-deluding optimism. It's a motivating force for innovation and entrepreneurial endeavour and it keeps the capitalist system turning.

Business people invent new gismos and launch new products because they're convinced the new thing will be hugely successful, making their name and fortune.

Few succeed. Most do their dough. But the ones who do succeed make us more prosperous than we were. Then they try again.

But I confess my optimism is part professional calculation. As a commentator I have a contrarian streak. When all my competitors are saying black, I look for a way to say white.

This isn't hard or contrived because the media have an inbuilt tendency to predict the worse, believing this will please the audience and make them more popular.

Journalists believe our audience finds bad news more interesting than good news. For sound evolutionary reasons I've discussed before, this is right.

But ever intensifying competition has prompted the media to go over the top in their search for the big and bad.

Trouble is, most readers are optimists like me. They want to sustain their belief that, despite the bad things happening, the world is still fundamentally good, Australians are basically decent people despite some recent lapses, and life will get better, not worse.

I fear the bad-worse-worst news formula may be too depressing for some people, prompting them to switch to Facebook and photos of their friends' latest holiday.

If that's how you feel, dear reader, I'm here to help.

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