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Is the US Economy in a Recession?

thetechnicaltake's picture





 

The National Bureau of Economic Research is the official arbiter of economic expansions and contractions.  Their official recession calls tend to be after the fact, and usually after much pain has been suffered by investors in the stock market.  Even now, there is a great debate amongst economists.  Is the US economy in a recession?  Is it a soft patch? Are we headed for a recession?  Ask two economists, and you will get 3 opinions.  Obviously, it is important to know, and to know early as such a deflationary event will have a great impact on which assets will outperform and which will lag.  Suffice it to say it isn’t trivial.

I have developed an indicator that correlates nicely with past recessions, and it is suggesting a high probability that  the USA is currently in a recession.  The indicator uses readily available data.  The first data point is the price of the SP500.  The second data point comes from the weekly leading economic indicator published weekly by the Economic Cycle Research Institute.  The third data point comes from the Chicago Federal Reserve, and this is the Chicago Fed National Activity Index (CFNAI), which is constructed from 85 data inputs itself.  These three data points generate my simple recession indicator, which goes back to the start of the ECRI and CFNAI data series in 1967.

Figure 1 is a monthly chart of the SP500.  The indicator in the lower panel shows expansion and contractions as determined by the NBER.  When the indicator is down, then this represents a recession.  The red labeled price bars represent those times my simple 3 input indicator suggested a recession was coming.

Figure 1. SP500/ monthly

Since 1967, there have been 7 recessions.  In 1970, the indicator warned of a recession 1 month before the official start of the recession.  In 1974, 1980, and 1981, the indicator signaled recession 3 months after the official start.  It was 1 month late in 1990.  In 2000, it was 6 months early.  In 2008, the indicator nailed the start of that recession.  Figure 2 shows 1970 to 1990. 

Figure  2. SP500/ monthly

There have been two false positives.  (See the ovals on figure 1.) 
One was at the end of the 2001/ 2002 bear market, and the second was
August, 2010.  It should be noted that many analysts were predicting
recession back then, but the Fed had other ideas – namely QE2.  Their
high octane efforts put off the recession for another year.

Is the US economy in a recession?

The answer is most likely.  We will need to wait several weeks to get
the September CFNAI data.  A negative reading will keep the indicator
below zero.  4 out of the last 6 values of the indicator have been
negative, and it would take a positive number not seen in over 10 years
to turn the indicator upward.  It doesn’t seem likely.

A simple indicator constructed from readily available data is
suggesting with great certainty that the US economy is already in a
recession.  Will the Fed be able to pull another QE out of its hat thus
distorting and delaying the inevitable?  I am sure they will try.

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Fri, 10/14/2011 - 17:35 | Link to Comment navy62802
navy62802's picture

It feels like we are in a stagnation. We are stuck on the verge of a full-blown depression, and all it will take to send us over the cliff is one cataclysmic economic event.

Sat, 10/15/2011 - 11:12 | Link to Comment asteroids
asteroids's picture

If there is anything I have learned from 2009 to today  is..... THE ECONOMY IS NOT THE STOCK MARKET! No correlation, zip. Not when the man behind the curtain can screw anything for whatever reason.

Fri, 10/14/2011 - 18:45 | Link to Comment Bob Dobbs
Bob Dobbs's picture

Like all of these financial cataclysms, it really depends who you percieve yourself to be, and what your expectations are.  I grew up in the sixties and early seventies.  I also was present, on active duty, at the end of the 'Vietnam era.'  We lost that one, remember?

That really sucked!  

But now I'm forty years older, and I guess this recession/depression just blows.  Who remembers the double digit inflation of the early eighties?  My wife and I thought we'd never get ahead, so my cheapskate genetics sort of took over.  I still fix my own cars, and I drive cheapos . . .

That really sucks!

College, marriage, children, jobs, and now I'm almost ready to retire.  You kids can have it.  It wasn't at all bad at times, but I'm not always right either.

Fri, 10/14/2011 - 21:11 | Link to Comment AldousHuxley
AldousHuxley's picture

you actually lived through the GOOD times of credit boom.....ask your children about their future. No jobs, no money for marriage, no time for kids, no money for college that is now useless, and certainly no retirement.

 

 

 

 

 

 

 

 

Sat, 10/15/2011 - 16:04 | Link to Comment Bob Dobbs
Bob Dobbs's picture

I do appreciate your concern for the here and now, but it seemed almost as gloomy when I was my kids age.  Different problems.  People adapt, so will you.

Fri, 10/14/2011 - 17:25 | Link to Comment DosZap
DosZap's picture

I KNOW, it's CN$*,but bear thru if you wish. He remarks we may be/have a CHANCE at a Recession.

Not according to JPM,pay attn to around 3:50 into it, and then the guy to right makes the std obligatory MSM remarks on Gold.

Gold is a ROCK...............really?,I thought  it was METAL,maybe encased in rocks............but, the similiarity ends there.

http://video.cnbc.com/gallery/?video=3000050147

 

Fri, 10/14/2011 - 16:08 | Link to Comment geno-econ
geno-econ's picture

RE flat for foreseeable future.  Unemployment although lagging, will persist and rising debt to GDP unfavorable trend with Euro waffling equals recession.  Any budget cuts  will have  negative impact.  Sell now and Join Wall St crowd

Fri, 10/14/2011 - 16:05 | Link to Comment mynhair
mynhair's picture

A recession in intelligence, yes.

Fri, 10/14/2011 - 15:52 | Link to Comment MFL8240
MFL8240's picture

Stock prices that are artificially inflated with printed confetti renders this chart worthless.

Fri, 10/14/2011 - 19:22 | Link to Comment cynicalskeptic
cynicalskeptic's picture

Forget meaningless stock market indices - it's all rigged.  The market was pushed back up by trillions of 0% money dfed into the system by the Fed.

 

REAL unemployment - the best indicator of a 'recession' or 'depression' - is and has been above 20% - over 23% now, as bad as 1932.   You really don't think that having 1 out of 5 people unemployed or grossly underemployed  is a mere 'recession' do you?

Fri, 10/14/2011 - 14:51 | Link to Comment falak pema
falak pema's picture

not if you listen to O'bammy : blame it all on Euro fumble.

Fri, 10/14/2011 - 14:52 | Link to Comment Taterboy
Taterboy's picture

Resession? You said a dirty word. Warren Buffett will jump out of his bathtub and wash your mouth out with soap.

Fri, 10/14/2011 - 14:50 | Link to Comment LookingWithAmazement
LookingWithAmazement's picture

The US economy is doing better than expected. No crisis, no Armageddon. US gov deficit is about the same as in 2010, not growing. Boring world we live in.

Fri, 10/14/2011 - 21:28 | Link to Comment AldousHuxley
AldousHuxley's picture

banksters are doing better than expected so all is good?

 

no growth is bad when every other 3rd world hell hole is even growing. Sooner or later complacency catches up and you have 3rd world for your children.

Fri, 10/14/2011 - 19:23 | Link to Comment cynicalskeptic
cynicalskeptic's picture

which is why the poster is getting paid 10 cents a post for pushing this propaganda - living at home in his parent's basement

Fri, 10/14/2011 - 18:59 | Link to Comment buyingsterling
buyingsterling's picture

What are you 'lookingwithamazement' at? Your own BS? And who is 'amazement' - one of your troll pals? Go have a nice nap.

Fri, 10/14/2011 - 17:16 | Link to Comment narnia
narnia's picture

I live in a major port city near a very active BNSF railway.  Activity has been noticeably slow for about 6 weeks.  

I also had the first fairly empty flight in some time a couple of fridays past.

I bet within shipping & air travel you'll see some forward indicators that answer this question.  

Fri, 10/14/2011 - 14:41 | Link to Comment Smiddywesson
Smiddywesson's picture

Ok, I like it, but it may have some holes that need to be rethinked.

Excerpt from a WSJ article this month interviewing the cofounder of the ECRI, and this index:

Economists downplay the WLI because of its high correlation with movements in the stock markets that have been volatile lately. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, calculates a correlation coefficient of 90% between the WLI and the S&P 500 stock price index.

“Essentially, so goes the S&P 500, so goes the ECRI,” he says.

The WLI, however, is not the only hammer in ECRI’s toolbox, says Achuthan.

To capture the macro-view, ECRI also puts together a long leading and short-leading index. The long-leading index, which has no exposure to equities, started falling back in December 2010 and is still falling.

In addition, ECRI puts together sector-specific indexes that cover areas including manufacturing, nonfinancial services, housing, credit and exports. These indexes are “overwhelmingly showing recession patterns,” says Achuthan.

Even the author of that index doesn't rely upon it and admits it just follows the S&P500 with a 90% correlation.  If that comprises 1/3 or your index, and you also use the price of the S&P500 as another third, you made your index MORE correlated to the S&P500, something it has been widely criticized for.  I love the use of the CFNAI, but I don't get your methodology.

PS:  This market is manipulated.  So in many respects, the price of the S&P500 is more important than any indicator, so you have the last laugh over a lot of very smart people.

PPS:  Historical indicators are dangerous in these days of zero interest rates and heavy manipulation.  A reserve currency can only die once, so you won't find examples of that in an historical chart.

Fri, 10/14/2011 - 22:58 | Link to Comment thetechnicaltake
thetechnicaltake's picture

Smiddy:

This was probably the best and most intelligent response to one of my posts that I have ever had on ZH.  Serious.  Yes, I am aware of the high correlation between ECRI's WLI and SP500; the indicator would function well with WLI and CFNAI alone

I could probably use price alone and predict the next recession with about 80% accuracy....

In any case, thanks!

Fri, 10/14/2011 - 14:49 | Link to Comment LawsofPhysics
LawsofPhysics's picture

"Historical indicators are dangerous in these days of zero interest rates and heavy manipulation.  A reserve currency can only die once, so you won't find examples of that in an historical chart."

 

True, so does anyone have charts of the death of the pound sterling and how the london exchange was trading?

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