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posted on 19 March 2016

Are We Headed Into Recession Now?

from Lakshman Achuthan, Co-Founder and Chief Operations Officer of ECRI

When we spoke with Reuters in January, we discussed how since last summer ECRI has been saying that the Fed's rate hike plans were on a collision course with the economic cycle. That realization only dawned on the consensus in January, triggering a major shift in market perceptions of the macro economy and the pace of Fed rate hikes.

At ECRI, we aren't forecasters using extrapolative econometric models. Rather, we're "monitorists," with an "I" - meaning that we monitor the indicators that best discern the current direction of the economic cycle, and those that best forewarn us when it's going to change cyclical direction.

In contrast, many analysts seem manic depressive, gyrating from one extreme view to another based on the latest data point. Those who were too complacent last year were blindsided by the economy's weakness earlier this year and overcorrected by prematurely predicting recession. This is the kind of thing that has a significant impact on rate hike probabilities.

Then the data firmed a little bit, which is why the "economic surprise indexes" turned up, and accordingly the same analysts did an about face, declaring that recession risk is gone. This is a classic example of why economic surprise indexes are so bad at predicting cycle turns, because, more often than not, turns in surprise indexes are false alarms, and false all-clear signals.

A case in point is retail sales. Last month that data showed an uptick, which the consensus quickly translated into "recession off the table." Yesterday we saw that retail sales data was revised down in a big way.

So are we headed into recession now?

Today we are not on the cusp of recession, but to be clear, the cycle also isn't about to turn up.

Regarding the cyclical direction of growth, it's obvious that , month-to-month or quarter-to-quarter gyrations notwithstanding, overall U.S. economic growth has been slowing for more than a year now, in terms of output, income, employment and sales, with yoy growth in GDP at a 1¾-year low, in nonfarm jobs at a 20-month low, personal income at a 16-month low, and IP moving towards December's six-year low.

And the prognosis is also clear: short-term gyrations aside, this cyclical slowdown will continue in the months ahead.

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