Written by Steven Hansen
On Friday on CNBC, ECRI renewed their recession call – now saying a recession should hit by mid-year 2012. Supporting evidence for this call was based on coincident data’s growth rate-of-change was falling to historical recession levels.
There is no current data in my world that is suggesting a USA recession. Econintersect focuses on elements of economic releases (and not the headlines) which historically have led economic cycles. Econintersect’s analysis is always based on the change of rate of growth.
And for the most part, these economic elements are suggesting the economy is improving – but also are indicating the growth rate of change is slowing or flat. But in all cases to date, the growth rate of change is above historical rate-of-change which would indicate an upcoming recession.
Most readers focus on the headlines of economic releases – jobs up, jobs down, industrial production up, industrial production down, trade up, trade down. Pundits grab these headlines and spout, then the markets react. Many of these pundits and most readers cannot assign a relative importance to individual headlines anyway.
Worse, headlines are usually a month old (or further back) views of the economic segment – and, even more concerning, the headlines will be quietly revised in the coming months. The headlines are almost always dead wrong at economic turning points.
This past week the January 2012 existing home sales data from the National Association of Realtors (NAR) made major downward revisions to their December 2011 data. And the January 2012 new home sales data from US Census made significant upward revision to the December 2011 data. This negated all analysis by any punter discussing December 2011 existing or new home sales.
This simply shows that one should be skeptical of most data when first issued as it is based on extrapolations, surveys and often incomplete information. It is better to look at rolling averages and trends where the likelihood of error is smaller.
Also this past week, the Chicago Fed National Activity Index (CFNAI) was issued. The CFNAI had been Econintersect’s primary coincident indicator tool as it provides a summary quantitative value for all the economic data being released. However, this index is inaccurate in real time. The CFNAI is based on headline data which (as discussed above) is revised for many months and years after being issued.
ECRI, who brings the Weekly Leading Index (WLI) which I report on weekly – also produces a monthly coincident index. Here is how the monthly issued CFNAI compares to the ECRI coincident index:
Both coincident indices are trending up – and the ECRI index turned up in October 2011 (and the data was released in November) while the CFNAI turned up in July. However, in real time – the CFNAI upturn was not evident until December (and the data release was January 2012) as this index’s revision is fairly large, and hid the turn until the revisions were made.
As a side note, Econintersect‘s forecasts showed the upturn in its December 2011 forecast (released in late November). Each indicator is measuring a different pulse point, and the Econintersect pulse point is Main Street which turns later in the current environment as the consumer is not driving the current economic “expansion”.
It is true that using ECRI’s coincident index, the year-over-year rate of change is at recession levels – however, the CFNAI’s rate of change provides a different conclusion.
In real time, ECRI’s coincident indicator may be providing a better yardstick for the Wall Street economy. While in hindsight, CFNAI seems more intuitive – but is inaccurate in real time because of backward revision. GDP lives in its own world (as opposed to what economy is experienced by the population in their own lives) and has general correlation to most broad forecasts or coincident indexes as a selected view of the overall economy. However, I do not believe GDP has a good correlation to the Main Street economy.
Economic News this Week:
The Econintersect economic forecast for February 2012 continues to indicate a strengthening of economic fundamentals. This index essentially uses non-monetary measures (counting things) to determine economic growth or contraction. Several of this index’s components draw on transport industry movements.
ECRI has called a recession. Their data looks ahead at least 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession start has been revised to hit around mid-year 2012.
This week ECRI’s WLI index value continues to be less bad at -3.5 – a negative value but the best index value since August 2011. This is the sixth week of index value improvement. This index is indicating the economy six months from today will be weaker – but increasingly marginally.
Initial unemployment claims were unchanged at 351,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell 7,000 to 359,000. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.
The data released this week which contains economically intuitive components (forward looking) was positive – the CFNAI. The CFNAI, however, is subject to so much future revision that I would take the recent data with a grain of salt. However, rail traffic year-over-year contraction reported this week was troubling
Weekly Economic Release Scorecard:
Bankruptcies this Week: Grubb & Ellis, CyberDefender
Failed Banks this Week: