Real Time Recession Indicator: 9.11.12
A real time recession indicator constructed from a composite of leading economic indicators, high frequency economic data, and SP500 pricing models continues to suggest that the US economy is NOT in recession.
This composite indicator utilizes data from the Economic Cycle Research Institute (WLI, LEI), the Philadelphia Federal Reserve (Aruoba-Diebold-Scotti Business Conditions Index), and the Chicago Federal Reserve (Chicago Fed National Activity Index). Furthermore, two SP500 price models (one proprietary and one not) are monitored. The data from the regional Federal Reserves and the ECRI continue to firm to the positive. In addition, the priced based models are far from confirming a recession. Although not in recession territory, growth isn’t exactly robust either as most measures are hugging the zero lines.
Figure 1 is a weekly chart of the SP500 with the composite Real Time Recession Indicator in the lower panel. With the indicator below the midline, the US economy is NOT in recession. Past and recent signals are shown. The 2011 signal turned out to be false and coincides with the launch of Operation Twist.
Figure 1. SP500/ weekly
Figure 2 is a weekly chart of the SP500 with an analogue graphic in the lower panel of one of the pricing models that goes into the composite real time recession indicator. The red labeled price bars are those times this price based model was consistent with a recession. For the record, the SP500 would have to close below 1224 to put this indicator into recession mode. That is over 200 points away!!
Figure 2. SP500/ weekly
Category: Equities
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- Daily Reading on the Financial Markets: 9/12/12 « Playing the Ponzi | September 12, 2012
I assume the historical data you are using is the final, revised calculations. Meanwhile, you are relying on first-run, unrevised data for your “real-time” indicator. The problem with this is that when the economy has a turning point, the real-time data will end up with massive revisions at a later date. Thus, your indicator is likely to suffer from a substantial lag in actually seeing a turning point and your confidence that the U.S. is not in recession may be misplaced.
John Hussman commented on this topic this week:
“Here in the U.S., Friday’s August employment report was surprisingly weak relative to Wall Street’s expectations, though hundreds of thousands of workers abandoned the labor force, which allowed the unemployment rate to decline. Relative to our own expectations, the figure was elevated, as I expect that the August employment figure will ultimately be revised to a negative reading. This would be consistent with revisions that we’ve seen around prior recession starting points.
For example, if you look at the originally reported data for May through August 1990, you’ll see 480,000 total jobs created (see the October 1990 vintage in Archival Federal Reserve Economic Data). But if you look at the revised data as it stands today, you’ll see a loss of 81,000 jobs for the same period. Look at January through April 2001, at the start of that recession. The vintage data shows a total gain of 105,000 jobs during those months, while the revised data now shows a loss of 262,000 jobs. Fast forward to February through May 2008, and though you’ll actually see an originally-reported job loss during that period of 248,000 jobs, the revised figures are still dismal in comparison, now reported at a loss of 577,000 jobs for the same period. As other good economic analysts have recognized, economic time series tend to be revised after-the-fact, with upward revisions in periods just before the recession begins, and downward revisions in periods just after the recession begins. I continue to believe that the U.S. joined an unfolding global recession, most probably in June of this year.”
http://www.hussmanfunds.com/wmc/wmc120910.htm
Matt
Thanks for the excellent and thoughtful comments….
Hussman is one of my favorites as well
The data used is 4 economic tools (LEI and WLI from ECRI, ADS, and CFNAI)….the data to these indicators does get revised week to week and month to month depending on the series; your concerns are partially correct but the actual indicators don’t vary all that much in the changes; for example, the CFNAI is made up of 85 variables
In addition, I include 2 pricing models
Then I take a weight of the evidence approach requiring 4 out of 6 variables to be positive to indicate recession or not
Here’s another fly in your ointment…ECRI does not rely on the WLI to forecast a recession. Achuthan is out again today saying their recession call stands: http://www.businessinsider.com/lakshman-achuthan-tom-keene-2012-9
The WLI is heavily influenced by stock prices, which you believe to be topping and I believe to be irrationally high whether they top now or later. If ECRI does not believe that WLI is a timely recession indicator, why do you?
Matt: Understand and agree….there is no one indicator that is perfect all of the time; this is why I use a weight of the evidence approach
The LEI from ECRI has a very high correlation with SP500 so why not just use a price base model?
I do use a price based model in the indicator but also these “fundamental” data points as well