The Elusive 2012 Recession: When Can We Expect It?
Since last Friday there has been a flurry of further TV interviews and newspaper reports covering ECRI's Lakshman Achuthan recession call. Here are links to two more TV appearances since we heard him on CNBC Squawk Box last Friday. Recession forecaster: Prepare for a new one, and GDP Data Signals U.S. Recession, Achuthan Says.
The good news is that he did not repeat his incorrect statements in those interviews. The bad news is that he still proclaims that there will be a recession shortly. ECRI's recession call is now 5 months old and getting a bit long in the tooth. Achuthan is on record saying that if a recession does not occur by the second quarter of 2012 then the call would have been wrong.
So when can we possibly expect this elusive recession? Our analysis shows that the earliest date is the beginning of October 2012.
The chart below shows the 6-month annualized growth rate of GDP calculated from the monthly GDP values which e-forecasting provides (ef-GDPg, the blue graph), and a medium leading recession indicator, the SuperIndex (SImed, the red graph). All graphs are plotted in real time, which is the time when the series values are actually reported to us. Therefore the graphs depict what an observer would have actually known at the time of observation, which is the horizontal axis of the chart.
With the January GDP estimate from e-forecasting included the ef-GDPg is now at 3.18%, a similar level as the revised data just released for the quarterly GDP growth for the last quarter of 2011. This indicator is now also above the 1968 to 2012 long-time average and just below the level of the in-between-all-recession average of 3.44%. For a recession to occur the GDPg graph would have to make a top and turn downwards. This is possible and will occur at some point in time – nobody knows when this will happen, but currently the trajectory of the growth rate is upwards as one can see. Shortly before, or at the beginning of the last seven recessions the ef-GDPg has always been on a downward trajectory and concurrently then its levels were always below its long-time average of 2.82%. (The levels were 0.94, 2.50, 1.40, 2.22, 2.18, 0.63 & 2.47 at the beginning of the last seven recessions, respectively)
One can monitor the direction of the economy with the PowerStocks RecessionAlert SuperIndex, a composite leading recession indicator which is updated weekly, as an alternative to consulting ECRI's Weekly Leading Index, which has provided many false recession warnings in the past. The SuperIndex provides warnings of recessions on average about three months before they start. From 1968 to now it has never given a false signal. This indicator is also pointing steeply upwards now as shown on the chart above and on the latest snapshot from www.recessionalert.com.
The economy is like a battleship at full speed – it cannot turn on a dime. For a recession signal the SuperIndex would have to make a top and then turn downwards and cross over the zero line. This will take some time to happen.
Looking at past history of the SuperIndex prior to recession starts we have identified the steepest- and also the average-track to recession for this indicator, which we then spliced to the end of the SuperIndex graph (the green line and gold lines, respectively) to depict a possible track which it could follow forward if for some reason the economy were to suddenly deteriorate.
The Earliest Date for a Recession Start
The earliest the SuperIndex, when following the steepest historical recession track, can cross the zero recession trigger line is near the beginning of August 2012. This is the earliest date when this indicator can signal an oncoming recession. If one applied a two months delay from the trigger signal to the recession start (which is less than the average delay before previous recessions), then the possible earliest date for a recession to begin would be at the beginning of October 2012. If this were to happen then ECRI's recession call from September last year would be proven to be correct, and would then be 12 months old, an unheard of "achievement". (See previous article: Recession – Just how much warning is useful anyway).
Were one to follow the average historical recession track, then the SuperIndex would cross the zero recession trigger line only at the end of January 2013, which would signal a possible recession start in April 2013.
We are not issuing a recession warning here. On the contrary, we believe from observing long leading indicators that a recession is currently not on the horizon. One has to monitor the GDP graph and the SuperIndex for guidance on the course of the economy. If the indicators make a peak and turn downwards it would warn us of a recession possibility. If, however, the indicators continue on their present trajectories, the stock market should improve further and the employment numbers should also get better.
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial “experts.” He has developed financial models for the stock market, the bond market and the yield curve, all published in Advisor Perspectives. The models are updated weekly. If you are interested to receive theses updates at no cost send email request to firstname.lastname@example.org.
Dwaine van Vuuren is CEO of PowerStocks Investment Research, a South African-based provider of investment research, and RecessionAlert.com. If you would like to receive the next 2 weeks SuperIndex Recession Reports for free, just email us at email@example.com with FREE SUPERINDEX in the subject line.