Recession Watch Rescinded

by: Steven Hansen

With the continued improvement of several major components of its economic index, Econintersect has rescinded its recession watch.

Econintersect's economic forecast for January 2011 is for flat or slightly positive growth. The Econintersect Economic Index (EEI) reversed a six month index decline with strengthening of several areas. Many of the underlying elements have been gaining strength for the last two or three months, and now the index has pushed back into positive territory.

click to enlarge charts

The EEI has improved from -0.08 to +0.04.

One major component of the EEI is transport related. Econintersect considers transport (truck, rail and sea container) counts a primary economic pulse point – and its trend represents underlying economic pressure.

This month, the transport portion of the EEI index strengthened for the second consecutive month. Although two months are not a trend, it is the strength of this portion of the index, in addition to the reversal of the index, which provides enough confidence to remove the recession watch. This portion of the index is quite noisy as it quantifies the month-over-month (MoM) change (positive numbers indicate seasonally adjusted MoM growth, negative numbers represent seasonally adjusted MoM contraction).

To Econintersect, transports represent the pulse of the real economy – the economy of Joe Sixpack. All of our man made surroundings, the clothes we wear and the food we eat are moved several times by transport during their processing / delivery cycles. A growing economy consumes more (and therefore transports more), a contracting economy consumes less.

Other Signs of an Improving Economy

In Econintersect’s view, there is no indication in the data of a return to the old normal – despite supposition by a few punters. On the other hand, the data has no signs of an economic downturn.

There are potential headwinds ahead (such as European and USA state bonds) which can effect this weak economic improvement. However, these headwinds are not likely to present a danger in January 2011.

For a complete explanation of the EEI, please see the October 2010 forecast.

Past EEI Forecasts for: December 2010, November 2010, October 2010, September 2010.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.