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Is the recession over?

Is the recession over? I think the odds favor the view that if it isn't already over it will end within the next couple of months. Of course, unemployment generally continues to rise even after a recession ends. But the fact that the stock market made a low nearly 5 months ago is a strong indication that economic activity will grow stronger as the months pass. Historically speaking, a stock market low precedes the end of a recession by less than 6 months.

This first chart comes from the July 25 edition of the New York Times.



It appeared in Floyd Norris' column. It depicts the behavior of the index of leading indicators near the troughs of recessions which occurred during the past 40 years. You can see that the index of leading indicators is trending strongly higher now and that is almost a sure sign that economic activity is starting to pick up and that the recession's end is imminent.



Here is an image of the latest Newsweek magazine cover. It depicts a balloon labeled "The Recession is over" about to be pricked and deflated by a pin labeled "good luck surviving the recovery". The cover story inside the magazine follows that theme. It says that even if a recovery has begun, it will be slow and that the next few years will feel like a recession anyway. Moreover, it goes further by asserting that this economic recovery will be qualitatively and quantitatively different from past recoveries - the damage done by the collapse in confidence will supposedly limit the economy's ability to grow for years.

From a contrarian traders's point of view this cover is more evidence that the bull market signal for aggressive contrarians will work out well. Newsweek is feeding the predjudices of the enormous bear market investment crowd that developed during 2008. But as prices rise this crowd will start to disintegrate and the resulting buying will provide a very strong upward impetus to the market averages.

One more observation: it is a well-established empirical fact about recessions that fast, deep declines in economic activity are followed by fast, steep recoveries. So Newsweek's prediction that this time will be different flies in the face of historical precedent.