Dwaine van Vuuren's  Instablog

An analysis of global Google search volume for the term "recession" reveals a promising new recession indicator that nailed the official NBER start of the 2008 great recession to within 2 weeks of its peak.

It is also interesting to note the spike in mid-to-late August 2011 (around the time the SP-500 bottom that was forming), and subsequent fall in the RecessionAlert SuperIndex around the time new recessionary fears peaked.

It is unfortunate we do not have history going further back on this indicator but it looks very promising as a "fear gauge" worth monitoring in the future.

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

Everyone treats employment figures as co-incident indication of an economy's status but a very useful leading economic indicator that deploys a wide range of labour market data is the Conference Board's Employment Trends Index (ETI).

The figures were updated today and according to Gad Lavanon from the Conference Board, "The Employment Trends Index has been improving rapidly for four straight months, suggesting somewhat more robust job growth is likely to continue in this quarter."

The ETI is one of the 9 components of our Composite SuperIndex and one of 4 leading indicators used by the SuperIndex. We deploy rate of change of the ETI for recession lead-signalling as shown below. The implied probability of recession is 0.1%. The system has an average lead of 6.5 months (5.5 months to the real-time observer) with a standard deviation of only 2 months in the 39 years since 1973. The ETI joins the Conference Board LEI in depicting low probability of recession.

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

It was interesting to observe the doom and gloom about a US double dip rise over the months, culminating in ECRI proclaiming the recession a "sure thing". One of our specialties (bordering on a hobby) is forecasting the probability of US recessions and US recession dating in particular. All through the last 6 months, whilst our recession probability models were indeed rising, they never got to the point where we were hitting any panic buttons. ECRI's reputation so far is beyond reproach, but we are steadfastly maintaining there is no recession in sight. In fact as it stands now, it is not even close.

We maintain models going back to 1940, but one of the most accurate recession forecasting and dating models we ever developed goes back to 1979 (due to lack of older data the model needs.) It takes the 50 state coincident economic indicators as published monthly by the Filly Fed and combines them into a single composite US coincident economic indicator. The method of the combining of the underlying coincident indices was designed to maximize the accuracy of  NBER recession dating. As it turns out this historical accuracy is 100% as it perfectly pinpointed every start and end date of the last 5 recessions with an unavoidable 1-month lag (as Filly Fed  coincident indices have 1 month lag). However an early warning mechanism allows for up to 2 months warning allowing the user of the model perfect real-time synchronicity with NBER recession dating.

Of course no model is perfect and can guarantee future results, and with only 5 recessions under the belt, it does not give us the comfort of 8 or 9 recessions used by our other models, but its accuracy cannot be ignored by the investor attempting to assess the risk of recession. Apart from the recession dating aspect, the model provides an interesting month by month view of the state of the US economy through its 1-month rate-of-change  indicator that is used to date recessions, as it gives us a view on the direction and power of the US economy at any point in time.

The model as at 30 Oct appears below:

The red "recession dating line" provides perfect synchronicity with NBER recession dating. When the 1 month rate of change of the composite economic index (US-CEI) falls below -1.2% you can proclaim recession and when it rises above -1.2% you can proclaim the end of the recession. Of interesting use is the -0.6% "early warning" line. When the rate of change indicator falls below -0.6 a recession is "a done deal" and gives 1-2 months advance warning in all historical cases.

As you can see from the model, in the last 6 months the indicator has not come close enough to the orange line to raise our concerns levels. In fact the US economy, as hinted at by the rate of change indicator is looking a lot more peachy than the investing public may have given it credit for.