Yesterday, Econintersect removed the recession flags we had raised for imports and equities. As the economy – measured by our forward looking indicator – is close to recession, we continually look for clues in the coincident indicators. Most of the data is 30 to 90 days older than our forward looking indicator.
Quantitatively, no index is perfect – and all contain an unknown error. So, like a trial lawyer – analysts try to build a case based on preponderance of evidence. Many tend to cherry pick the evidence to support their predetermined conclusions. Econintersect cherry picks too – but not to support any particular conclusion – but because some data sets do not correlate well to overall economic activity.
An economy is billions of points which are moving in many directions. It is always possible to find a data set which supports any conclusion.
No one can be absolutely sure of anything (because of the extraordinary intervention by governments, both fiscal and monetary). This intervention has distorted the data causing possible (and often unknown) changes in prior correlations. Add to the mix that the economy is in a depression caused by debt. The Great Recession never ended. Only smoke and mirrors, and an incomplete recession determining methodology said the recession ended.
Main Street did not start recovering for 6 to 12 months after the official end of the recession and, by most measures, is a long way from full recovery.
ECRI opened Pandora’s box with their recession call in late September. This caused many pundits to either refute ECRI’s call, or to acknowledge and go on with business , as Econintersect has done. Personally, I have too much respect for ECRI to refute – so my mission is to dig deeper into the data.
Econintersect will release its forward looking economic index for November in a week, but it is instructive to view some of the coincident indexes which historically have turning points coincident to or leading recession start dates.
Industrial Production (manufacturing) is well out of a recession zone and is not trending towards a recession.
Employment has been historically an almost perfect indicator of a recession, and this too is away from recession territory – although the trend line is currently flat (growth is not improving – second derivative equals zero).
A portion of the ISM manufacturing index also has a high correlation to recessions. This index is also well above historical recession levels.
All the above are non-monetary based indexes. Inflation is not distorting the values. Retail Sales have also been fairly good at foreseeing a recession. Currently the inflation adjusted retail sales says the USA economy is well above recession territory.
There may be other coincident indicators which foresee recessions with high accuracy – however these are the ones with which I am most comfortable. As of 30 September 2011, the data says the economy was well above recession levels.
But ECRI’s forecast is based on their own proprietary methodology which has elements which see over a year in advance. Nothing in this discussion disproves ECRI’s forecast – it only proves that the economy is likely not in a recession today.