Spoiler alert: We could already be in a recession. This is not the conventional wisdom. The common narrative goes some like talks look ugly, but in the end things will get resolved either before Jan. 1 or later in the month and the economy gets a new lease on life. See MarketWatch’s fiscal-cliff page.
The recession signal is being sent from the latest U.S. current account deficit report released earlier Tuesday.
According to the data, imports are now down two months in a row having fallen 8.4% in the third quarter and 2% in the prior quarter. This is a rare event and has definitely raises the recessionary “red flag,” according to Robert Brusca, chief economist at FAO Economics. When the economy weakens, imports weaken rather quickly, Brusca notes.
The last time imports declined for two quarters was in 2009, the end of a four-quarter slide in imports during the Great Recession.
Fewer imports is a sign that domestic demand is faltering. A recession is “a real risk,” Brusca said.
I don't think we're currently in a recession, so I wanted to run the numbers on this statement. What I found was really interesting. Consider the following scatter plots.
Above are four decades comparing the year over per percentage change in real imports on a quarterly basis, with the year over year percentage change in real GDP on a quarterly basis. The top chart is for the 1970s, the second from the top is for the 1980s, the third from the top is for the 1990s and the fourth from the top is for January 2000 to July 2012. Note there is a pretty strong correlation between net negative YOY change in imports and net negative year over year GDP and positive YOY imports with net positive YOY GDP.
The primary difference between the story's measurement and the above is the story is using month to month percentage change and the above is using a quarter measurement.
Put another way, imports are a pretty good coincident indicator.