Submitted by Alexander Gloy of Lighthouse Investment Management,
Lakshman Achutan, ECRI (Economic Cycle Research Institute) made a recession call for the US on September 30, 2011 (and confirmed it multiple times since then).
Gary Shilling, titling his August letter “Global Recession”, says “We are already in a global recession.”
However, equity markets don’t think so, with the S&P 500 trading less than 10% away from a new all-time high. Only one side can be right. Could this be a repeat of October 2007, when the S&P 500 hit new all-time highs mere six weeks before the “Great Recession” began? Are so-called leading indicators, as used by the Conference Board, still reliable?
SUMMARY: Established leading indicators incorporate questionable input. While there is no perfect indicator, a combination of the ones tested above, weighed by accuracy, confidence and timeliness should produce a good reading.
The higher-confidence indicators say that 2011 was a “close call”, but we are currently not in a recession. However, a lot of lower-confidence indicators are showing readings consistent with a severe recession.
It is entirely possible we narrowly avoided a recession in 2011 and are heading towards another one in 2013. Currently, however, combined indicators suggest only a 10% likelihood of being in a recession at this point (September 2012).
The US economy is experiencing the slowest recovery of the past 50 years (both from an employment perspective as well as from GDP growth). After looking at total credit market debt outstanding I concluded this was due to a decline in the marginal utility of additional debt (see this post). Some readers have mistaken me for an advocate of more quantitative easing. I should have been more clear about this: I do not think printing money is an appropriate remedy for economic woes. Enabling the government to finance fiscal largess at artificially low rates is unlikely to cure problems related to excessive debt levels.
Full report (PDF):