For the past several months, the most historically reliable leading data have indicated that the development of a recession in the US is likely during 2012. As anticipated, coincident economic data have deteriorated meaningfully during the last two months, with many measures moving into contraction territory, suggesting that the US is joining Europe in a global synchronized recession. In his latest weekly commentary, fund manager John Hussman reviewed the recession scenario, indicating that the likelihood of a US recession is approaching statistical certainty based on his measures.
In recent months, our measures of leading economic pressures have indicated the likelihood of an oncoming U.S. recession. Our view is based on the analysis of leading/coincident/lagging indicators as well as more statistical signal processing methods that extract "unobserved components" from noisy data. The following chart shows the most leading economic component (blue) that we infer from a broad composite of economic indicators. This component has a lead of several months, relative to broadly observed economic data. Importantly, even the observable data has now predictably turned down, as evidenced for example by the "surprising" weakness in the Philly Fed data last week. We expect further weakening in employment data, coupled with an abrupt dropoff in industrial production and new orders.
In March, we expected the coincident trend (observed composite) to rollover and follow the leading trend (extracted signal) lower. Since then, the deterioration in coincident measures has developed exactly as anticipated. The emerging weakness was slight in May, missing consensus expectations by small amounts, before accelerating in June. Given the prototypical fashion with which the deterioration is developing, we would expect the weakness to continue gaining momentum during July.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.