Recession Talk Is Dissipating

by: Steven Hansen

This past week Industrial Production (analysis here) finally exceeded the July peaks, and now all of the economic broad measures are at 2012 highs. In a week and a half we will see the advance estimate of 4Q2012 GDP. It looks extremely unlikely this GDP estimate will show the economy contracted.

Yet one recession call remains on the table. On 07 December 2012, Economic Cycle Research Institute (ECRI), a New York-based independent forecasting group stated:

Following our September 2011 recession call, we clarified its likely timing in December 2011. Based on the historical lead times of ECRI's leading indexes, we concluded that, if it didn't start in the first quarter of 2012, it was very likely to begin by mid-year.

But we also made it clear at the time that you wouldn't know whether or not we were wrong until the end of 2012. And so it's interesting to note the rush to judgment by a number of analysts, already asserting that we were wrong.

ECRI specifically pointed to the weakness in the measures of production, income, employment and sales:

So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators - the broad measures of production, income, employment and sales - saw their high points in July (vertical red line in chart), with only employment still rising.

The current state of the coincident indicators is shown on the graph below.

At this point their own Weekly Leading Index (WLI) which is advertised to have a six month forward vision went positive in August 2012 - the logical conclusion is that by February 2013, the chance of a recession is gone. The current WLI levels are far from territory associated with past recessions.

What ECRI is hanging on to is hope that backward revision of the data will prove them correct that a recession did indeed occur. The primary markers used to date a recession are revised YEARS after the first data is published. The best example is GDP itself. The advance 4Q2012 GDP estimate will be published at the end of the month. The advance estimate historically seems nothing more than a wild guess looking at the historical correlation to the current GDP figures published by the BEA.

Here is how NBER dates a recession:

We view real GDP as the single best measure of aggregate economic activity. In determining whether a recession has occurred and in identifying the approximate dates of the peak and the trough, we therefore place considerable weight on the estimates of real GDP issued by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.

The problem is GDP data is never set in concrete (and neither is the sector data for production, income, employment and sales). Notice in the above graph, the 2001 recession was likely not a recession as GDP never went negative. Once the NBER makes a decision on dating a recession - it is a god-like decree set in concrete.

Whether there was or was not a recession in 2012 is no longer the point. The point now is 2013 (using forecasting data from ECRI and many other sources) looks recession free. Maybe it is time for ECRI to say publicly the future seems marginally brighter for our weak economy - and possibly toss in a mea culpa on the recession call.

My usual review of economic releases is in my instablog.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.