ECRI Weekly Leading Index Slides, Economy So-So in Q4
Has ECRI blown it with their forecast a few months ago that the US was sliding into a new recession?
The short answer is probably not. In reality, recessions rarely begin with a very obvious falling off of the cliff. More often, initial, unrevised data is mixed, and maybe even slightly upbeat, for several months leading into and inside of new recessions.
While most economists now predict a less than 1 in 4 chance of a US recession in 2012 (down from around 40-50%), really the verdict is still out, and is probably still closer to 50-50, at best.
The reality is that forward-looking, global, US-impacting leading indicators, taken in aggregate, point at the very least to more trouble ahead in 2012, if not outright technical recession.
The good news is that despite a drone of election year memes that "Obama made the economy worse," the economy has come a very long way from the depths of the Great Recession. From a period when the US was right on the edge of falling headlong into another Great Depression, losing 700,000 jobs a month and with GDP contracting at a rate of nearly 9%, the US has now been adding about 150,000 jobs a month, with GDP growing at a rate of nearly 2%.
I guess you can call that whatever you want, but the math is simply that of an economy in recovery mode.
The not-so-good news is that we fell so hard between 2007 and 2009 that the recovery of late 2009 to late 2011 has not yet been sufficient to result in anything close to a full recovery.
This has been the unfortunate trend over the past couple of decades. Even a "mild" recession, like the recession of 2001, took four years or so to recover from, and by comparison, the 2007-2009 recession is now known to have been the worst since the 1930s.
New York Times
Forecasting Fog
The American economy certainly isn’t at peak strength. With unemployment at a painfully high 8.6 percent, it can’t be. But unless the economy receives another shocking blow, it isn’t in imminent danger of relapsing into recession.
That was essentially the outlook presented by Federal Reserve policy makers last week when they ratcheted up their assessment of the nation’s economic condition. They concluded that the economy is on a path of moderate recovery, so the Fed needn’t take further action right now.
That relatively sanguine appraisal also appears to be the consensus of most private economists and Wall Street strategists. “The best case appears to be a ‘muddle through’ outcome in which the U.S. maintains its current growth rate,” as Barclays Capital put it recently in its annual report on the global outlook.
Such views represent economists’ best efforts to predict the future. But how much credence should they be given? After all, a vast majority of economists, including those at the Fed and in the White House, didn’t foresee some of the most crucial developments of recent years, like the severity of the subprime mortgage crisis and the housing market’s decline, the onset of the financial crisis and the Great Recession, and the weakness of the subsequent recovery.
In this season of forecasts and predictions, it’s certainly worth remembering that navigating the economy of late has been like driving in a dense fog. In such conditions, when you don’t really know what lies ahead, it’s wise to proceed with utmost caution.
Let’s look at a few reasons to be skeptical about the “consensus” forecast:
First, not everyone subscribes to it. As I wrote in a recent column, the Economic Cycle Research Institute, an organization with an excellent track record, says the United States is actually heading into another recession, if it isn’t in one already. The institute was founded by Geoffrey H. Moore, an economist who helped originate the practice of using leading indicators to predict business cycles. It bases its conclusion on a series of proprietary indexes.
In an interview in the institute’s office in Midtown Manhattan, Lakshman Achuthan, its chief operations officer, acknowledged that recent data, like the drop in the unemployment rate from 9.0 percent to 8.6 percent, have been positive. But this doesn’t alter his view. He said the institute’s leading indicators - which incorporate data on purchases, inventories, credit, business and consumer confidence, housing, real estate, global trade and profitability - unfortunately continue to signal recession.
“It’s normal to see data that seems reasonably strong even when a recession is just getting under way,” he said.
Next, examine the Fed’s own projections. In a statement at the end of the Federal Open Markets Committee meeting last week, it said the housing market - usually an important component of a recovery - remains moribund. Moreover, it said, economic growth will be too anemic to have a low unemployment rate anytime soon. In this vulnerable time, “strains in global financial markets” - read, turbulence in the euro zone - pose a serious threat, it added. A financial shock could darken the outlook immediately.
Then consider the private consensus. Economists polled in December in the Livingston Survey of the Federal Reserve Bank of Philadelphia downgraded projections made only six months earlier, by estimating that real G.D.P. in the second half of this year would rise at an annual rate of only 2.5 percent, not 3.2 percent. For the first half of 2012, they project an increase of only 2.1 percent, down from 3.0 percent. These forecasts could rise again, of course - but could also easily fall again.
More troubling, the forecasts of both the Fed and private economists have been way off the mark in recent years. For example, in December 2007 - when the Great Recession started, as we now know - most economists inside and outside the Fed believed the economy was still growing. Livingston Survey economists at the time predicted growth in real G.D.P. of 1.9 percent in the first half of 2008, with a jump to 2.8 percent in the second half. Fed staff economists made a similar forecasting error, as Simon Potter, director of economic research at the New York Fed, documented in a recent blog post.
Perhaps even more disturbing is that on June 9, 2008 - in the middle of what would be the longest and deepest recession since World War II, Ben S. Bernanke, the Fed chairman, said he thought conditions were improving. Remember that Mr. Bernanke is a distinguished economist with a vast array of information at his disposal. Yet he said in Boston, “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” In fact, the housing crisis was deepening, and the financial system and the economy would soon go into a tailspin...