Current ECRI WLI Growth Index
On 06 December 2012, Lakshman Achuthan (ECRI's Chief) talks with Larry Kudlow, who knew ECRI's founder, Geoffrey H. Moore. They discuss that the indicators used to determine official U.S. recession dates for almost a century have now been falling since mid-year.
Here is this weeks update on ECRI's Weekly Leading Index:
A measure of future U.S. economic growth rose last week,and the annualized growth rate pulled back slightly.
The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 126.8 in the week ended Nov 30 from 126.2 the previous week.
The index's annualized growth rate improved marginally to 3.5 percent from 3.4 percent a week earlier.
ECRI Post on 29 November 2012.
The Tell-Tale Chart
Following our September 2011 recession call, we clarified its likely timing in December 2011. Based on the historical lead times of ECRI’s leading indexes, we concluded that, if it didn’t start in the first quarter of 2012, it was very likely to begin by mid-year.
But we also made it clear at the time that you wouldn’t know whether or not we were wrong until the end of 2012. And so it’s interesting to note the rush to judgment by a number of analysts, already asserting that we were wrong.
So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising.
But if we’re in recession, and the business cycle peak was in July, how could employment be higher three months later? Actually, this was also true in three of the last seven recessions – and in the severe ’73-’75 recession, job growth stayed positive eight months into the recession. Thus, positive jobs growth isn’t inconsistent with the early months of recession. Of course, all of this data is subject to revision, but, as we’ve noted before, the ultimate revisions to coincident indicator data after business cycle peaks tend to be downward.
If you look at the size of the simultaneous declines in industrial production and personal income since July, that combination has never occurred outside a recessionary context in over half a century – but it’s occurred in every recession. This leads us to conclude that we are most likely already in a recession that began around mid-2012.
Now, please remember that, following our recession call, central banks really ramped up their efforts, and have literally been pumping more money into the economy than at any time in the history of humanity – and this is the upshot. No wonder the Fed is now all in.
So how come hardly anybody recognizes the recession? Perhaps it’s because of real-time data showing positive growth in GDP and jobs, and the lack of a recent salient shock.
Many believe a major negative shock is necessary to start a recession. But think back to the big shocks in the last two recessions. The 9/11 attacks were widely believed to have triggered the 2001 recession that had really started six months earlier. And many thought that the financial turmoil set off by the Lehman Brothers failure caused the 2007-09 recession that had actually begun nine months earlier.
At the time, with seemingly positive – indeed strongly accelerating – GDP growth in the first two quarters of 2008, most didn’t realize that a recession was already in progress when Lehman collapsed. The week after, Chairman Bernanke, pressing Congress to enact the TARP legislation, said to the Senate Banking Committee that if it wasn’t passed, “jobs will be lost … [and] GDP will contract” – namely, a recession would ensue.
Sounding a similar tone last week, he warned that if the fiscal cliff wasn’t avoided, it “would send the economy toppling back into recession.” Once again, he seems unaware that a recession is underway.
So, what does this recession mean for people? The bottom line is that production, income and sales will keep trending down for now, and employment too is likely to turn down.
Nobody likes to be the bearer of bad news, but a recession isn't the end of the world. There have been 47 recessions in the past 222 years and, as before, we’ll see renewed growth after the 48th. Because business cycles are part and parcel of how all market economies operate, that’s about as close to a sure thing as it gets.
ECRI Post on 13 September 2012:
It has been almost a year since we predicted a recession. Back in December, we went on to specify the time frame for it to begin: if not by the first quarter of the year, then by mid-2012. But we also said at the time that the recession would not be evident before the end of the year. In other words, nine months ago we knew that, sitting here today, most people probably would not realize that we are in recession – and we do believe we are in recession.
Think back to four years ago in 2008, a couple of days before the Lehman failure. Looking at the data in hand, you would see GDP growth at about 1% in Q1 and 3% in Q2. More specifically, Q2 GDP growth had just been revised up on August 28 from 1.9% to 3.3%, sparking a 212-point Dow rally that day.
In an interview featured in a recent issue of Bloomberg Businessweek Chairman Greenspan was asked whether anything during the financial crisis had changed his worldview the way Ayn Rand had decades ago. He said, “Yes, of course,” recalling the day before the Lehman collapse when he had said that recession was probably coming – not that it was already nine months old. At the time, he was far from alone in his view. When asked if that mistake had been humbling, he replied, “Indeed.”
In our experience, too, monitoring business cycles is often humbling.
In March 2001, 95% of economists thought there would not be a recession, but one had already begun. And we do not recall anyone outside our shop predicting the 1990-91 recession beforehand.
Hardly any economists recognized the severe 1973-75 recession until almost a year after it started. Indeed, that recession began with the ISM at 68.1, and payroll jobs growth did not turn negative for eight months.
In 1970, unaware that the economy was nine months into recession, none other than Paul Samuelson said that the NBER had worked itself out of a job, meaning that improved policy expertise had made recessions very unlikely.
The key point here is that it is really difficult to know that a recession has already begun – until long after the fact.
But what data supports our recession call? We just discussed what GDP had looked like four years ago. Please note that for each of those two quarters GDP growth has since been revised down by two to three percentage points. Those are huge revisions.
Likewise, GDP growth prints for each of the first two quarters of the two prior recessions were revised by about two to four percentage points. The takeaway is that, in the early stages of recession, the data are almost always revised down, and the revisions tend to be quite substantial near business cycle turning points.
Knowing this, how should we feel about the current GDP estimates that average less than a 2% pace for the first half of 2012, i.e., weaker than first-half GDP growth looked four years ago? Please remember, by that time, in September 2008, the economy had already spent nine months in recession.
In the current cycle retail sales have already peaked back in March 2012 and, according to the household survey, employment has declined for the last two months, and for four of the last six months. Mind you, the household data is revised a lot less than the payroll jobs data and also tends to lead it a bit at cycle turns. (While the jobless rate, calculated from the same data, is yet to turn up in this cycle, that is mostly due to people dropping out of the labor force.)
Since July, when we highlighted the weakness in personal income growth, there have been revisions showing even weaker income growth going back a few months, followed by some apparent recovery recently. As with some of the other coincident data, this series will come under significant revision in the months (and years) ahead. Nevertheless, the weakness in income growth is showing through in retail sales data, which, as mentioned, has actually declined since March.
Many point to the stock market being at new highs as evidence that there is no recession. But as people have learned over time, the market is not just about the economy. That is one reason we forecast business and inflation cycles around the world, but we do not make market calls.
Consider the facts. In three of the last 15 recessions – specifically, in 1980, 1945, and 1926-27 during the Roaring Twenties – stock prices remained in a cyclical upturn. Of course, in 80% of those 15 recessions there were cyclical downturns in stock prices. So, while recession does mean high risk for equities, it does not guarantee a stock price downturn. Then there is the worst recession in the last 100 years, when stock prices peaked only after the recession began in August 1929. No doubt, equities have done well in recent months, but is that because of the economy’s strength, or is it about central banks?
While the new U.S. recession is ECRI’s most high-profile call, we have made a number of other key forecasts this year. In April, we predicted an upturn in U.S. home price inflation, as well as a downturn in global industrial growth – and we have been consistently pessimistic about Chinese growth all year.
Some believe that our own Weekly Leading Index contradicts our U.S. recession call. This is not the first time that charge has been made. Recall that, a couple of years ago, people said that its movements guaranteed a double-dip recession. At the time we flatly and correctly rejected that interpretation. Today we can tell you that the Weekly Leading Index is not pointing to recovery and, more importantly, this is also the message from our full array of leading indexes.
For the U.S., the economy is recessionary despite all of the extraordinary efforts by the Fed over the past four years. In that sense, one might argue that, as far as the economy is concerned, the Fed’s actions have become increasingly ineffective. The plunge in the velocity of money to record lows tells us that the Fed is pushing on a string – so no matter what they do there will only be limited traction. Basically, the recession has to run its course.
ECRI produces a monthly issued Coincident index. The October update shows the pace of the economy was gradually slowing month-to-month. The current values:
U.S. Coincident Index
ECRI produces a monthly inflation index - a positive number shows increasing inflation pressure. The November (for October data) update shows growing inflation pressure. The current values:
U.S. Future Inflation Gauge
U.S. Future Inflation Gauge Dips
U.S. inflationary pressures were slightly lower in October, as the U.S. future inflation gauge slipped to 103.5 from an upwardly revised 103.6 in September, originally reported as 103.4, according to data released Friday morning by the Economic Cycle Research Institute.
"Despite its latest downtick, the USFIG remains close to its September high," ECRI Chief Operations Officer Lakshman Achuthan said in a release. "Thus, U.S. inflation pressures have increased somewhat since August."
ECRI produces a monthly issued Lagging index.. The current values:
U.S. Lagging Index