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
Doug Short at dshort.com has posted some excellent work on the ECRI’s WLI, which has been all over the map since the Federal Reserve began expanding it’s balance sheet in 2009. Short has been extremely critical of Lakshman Achuthan, ECRI’s chief operations officer, as he made his recession call in September, 2011. Lakshman no doubt will be right but so is a broken clock — at least twice a day. Since ECRI’s call in September, 2011, the SP500 is up approximately 30%. Figure 2 is a weekly chart of the SP500 with ECRI’s WLI in the lower panel. The red labeled bars are those times that WLI suggested that the US economy was in recession. Since 2009, WLI has been better at predicting Fed intervention than the next recession. Of course, the Fed was intervening because the economic data was weak. But with the Fed sitting on the sidelines –remember they are already “all in” — one has to wonder what they are going to do the next time the economy weakens. In any case, WLI has improved for 12 straight weeks now, and one as to wonder, are we getting to the point where it should start to rollover? If so, will the slide in the economy see stocks rollover as well?
Figure 2. SP500/ weekly