What is the Zarnowitz rule for recessions and rebounds?

Posted May 11th 2009 4:45PM by Connie Madon
Filed under: Economic Data, Housing, Financial Crisis

Who is Victor Zarnowitz? What was his contribution to the financial cycles theories? Victor Zarnowitz fled the Nazis in 1939 only to end up in a Soviet gulag. He made his way to the US and became professor of economics at the University of Chicago. Later at the National Bureau of Economic Research, he studied and dated recessions and expansions. Essentially, the Zarnowitz rule says that deep recessions are almost always followed by rapid rebounds.

Let's look at some numbers. Consumer confidence shot up by the most in two years. Rising stock prices and falling mortgage prices had its biggest bounce in since 2005.

On the flip side the economy shrank 6.1% in the first quarter and 6.3% in the previous quarter. You would need to go back to 1957-58 to find a similar performance. Inventories fell by 2.79 percentage points, indicating that businesses cut stockpiles at the fastest pace since records began in 1947.

So now, what are the signs that the Zarnowitz rule is working? For one thing when inventories are worked off, they then must be replaced. Do we see signs that this is happening? The answer is yes. Toyota Motor Corp is scheduling overtime at the factory building the RAV4.

What about housing? Allen Sinai, chief economist at Decision Economics believes that housing has bottomed. Prices of resales posted their biggest gain since 2005.

Then add President Obama's stimulus package of $787 billion, part of which will go to $13 billion in extra Social Security payments.

Of course you have the nay sayers. David Rosenberg, now with Gluskin, Sheff & Associates. disagrees. He cites high consumer debt, which is now at 27% of household income when mortgages are counted in. House prices have fallen 27% since their peak. Unemployment is now at a 25-year high of 8.9%. And finally, the banking crisis is not over with banks needing to raise another $74.6 billion.

So the big question is: "where do we go from here?"

Tags: Victor Zarnowitz, VictorZarnowitz, What is Zarnowitz rule, WhatIsZarnowitzRule