Week in Review: Arguing For the Coming Recession

No data in the grouping of economic indicators which historically lead the economy (and Econintersect follows) is predicting an economic downturn.

I considered listing the folks who think a recession is coming (including ECRI and John Hussman) with those that do not - but realized that a recession call when no major economic indicator is even suggesting one is coming requires taking a leap of faith - or knowledge of an event so powerful it would trigger a recession.

In economics, trends are believed to be a indicator of the future. The current trends show a weak but improving rate of growth. But we all know that by the time a trend reverses or changes - the economy is already under the influence of that changed position.

First of all, neither ECRI nor John Hussman is a quack or an extremist - they represent main stream organizations which must be right much more than they are wrong (or they lose clients and profits). ECRI's forecasts are their bread and butter - and serious client loss is likely to follow a bad recession call. I believe both ECRI and John Hussman are sitting on a mound of evidence (other than what is publicly exposed) with a strong conviction a recession is coming.

I am a doubting Thomas about most things. The internet and the print media are full of half considered and ill considered OPINION - and seemingly reasoned analysis based on a misunderstanding or misinterpretation of the data or facts.

I do not find this the case with ECRI or John Hussman. Yet, I remain unconvinced a recession is coming - and equally unconvinced one is not. What can one do in this environment where the coming months are filled with uncertainty? It is hard to invest or trade.

This past week the Federal Reserve Board of Governors Open Market Committee (FOMC) said the economy was currently expanding moderately (see first article under author's photo) and that this growth will continue over the coming quarters.

The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook.

Somebody is wrong - either the FOMC (who are the guardians of monetary policy) or ECRI/Hussman. Of course, the FOMC conditioned their statement noting that global financial events will ultimately govern. Could you envision the commotion if the FOMC stated a recession was a certainty in 1Q2011? Nah, the FOMC would never say a recession was coming - and would only admit to one after it was common knowledge.

Fed transparency does not seem to mean it conveys the total opinion or information - or explains any situation precisely.

  • How likely is it that the Fed is unaware of the data that ECRI or Hussman is using?
  • If they did not have this information, would you not think they would investigate?
  • If they disagreed, would it not be likely they would specifically refute these recession calls like they have been doing with other statements.

This suggests the Fed believes the chance of a global financial firestorm is reasonably possible, and it may be what both ECRI and Hussman are seeing also in some of their indicators. This would explain why no evidence is appearing in non-monetary forward looking coincident data as the recession trigger event has not yet occurred.

Economic News this Week:

The Econintersect economic forecast for December (second article under author's photo) predicts weak but improving economic growth.

ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown. Although Econintersect data is not recessionary (one month look-ahead) - we take this recession call seriously. This week the actual level of ECRI's WLI index was "less bad" - but as the graphic shows below, the index has been in a range between -7.4 and -7.8 for the last five weeks. However, this index is still indicating the economy six months from today will be worse.

Initial unemployment claims fell 19,000 (from 385,000 which was revised up from a preliminary 381,000 last week) to 366,000. Looking back, the last time initial unemployment claims were this low was in May 2008.

Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background in third article under author's photo). The real gauge – the 4 week moving average – fell slightly to 400,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.

One specific note: The improvement the last few weeks has all been due to seasonal adjustment (SA). A month ago (November 12), claims were 362,835 NSA and 391,000 SA. This week the numbers are 433,287 NSA and 387,750 SA. Last week they were 528,793 NSA and 394,250 SA. If everyone was following the NSA there would be much hand wringing about the surge in new claims.

Overall the data this week continued to show a weakly improving economy. There were no recessionary flags. The global markets continue to react to developments in Europe.

Bankruptcies this Week: Lee Enterprises, RoomStore, Americas Energy

Click here for interactive version of the following table with active hyperlinks.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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