We have been observing the recent collapse of the ECRI index in all its glory over the past several months. As we have discussed previously, this is one of David Rosenberg's preferred leading indicators. Below we present some of his summary observations on the four distinct cycle in the ECRI index, with an emphasis on the current one, which as Rosie highlights is Phase IV - Recession (Zero to Trough), in which the S&P drops by 6.4%, and the worst performing assets are consumer discretionary, industrials and tech, contrary to what has been performing the best over the past six months. Time for some sector rotation.
The growth rate on the ECRI leading index did it again! It sank further into negative terrain, now at -9.8% during the week ending July 9, down from -9.1% the prior week. This was the tenth deterioration in a row and the growth index is now negative for six straight weeks. We have never failed to have a recession with the ECRI at current levels but there is also inherent volatility in the index that requires acknowledgment. Our reckoning is that in the past few weeks, the index has gone from pricing in even-odds of a double-dip to two-in-three odds. It may take a while, but Mr. Market will figure it out before long.
All we hear from in the mainstream economics community is that double-dip recessions are out of the question because they are “extremely rare” events. The double-dip deniers say that this only happened in 1982 because of the renewed sharp tightening by the Fed (as if we aren’t going to see a sharp fiscal withdrawal this time around to take its place). What is it that these economists and strategists don’t see?
These “extremely rare” events have been the norm for the past 24 months: negative nominal GDP growth; negative operating earnings; a massive contraction in credit; a 30% slide in home prices (these same economists — Bernanke too — were telling everyone that home prices never deflate over a 12-month time span ... but they did this time!); a record-high duration of unemployment.
The past 24 months have given us a lifetime of “extremely rare” events, but as we suggested last week, these are only “rare” from the perspective of an analyst that sees the past 24 months as a typical post-WW2 recession. In a balance sheet recession, these extreme events are the norm, so the “extremely rare” would be things like, expansion of private credit, strong inflationary pressures, rapidly declining unemployment and rising interest rates.
Relying on indicators that have been useful in previous post-WW2 recessions is like comparing the statistics of U.S. football teams versus the statistics of Australian football teams. They may be called the same thing but they are different sports. The economy is one sick puppy and we are seeing first hand now what it looks like once the crutch of government support is taken away.