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.
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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
There is a debate in the blogosphere as to the value of certain recession indicators. It really isn’t a debate as really only one party is questioning the validity of another party’s market call. More specifically, Doug Short of dshort.com put “called out” ECRI’s Lakshman Achuthan over 6 month’s ago because of his recession call made in Q4 of 2011. In essence, Short has been hypercritical of Achuthan because the accuracy (i.e., timeliness) of the recession call has been very poor. This has been a one sided argument. As to my knowledge, I have not seen Achuthan respond to Short directly. Achuthan remains a popular figure on the media rounds.
In any case, you can view Achuthan’s recent media blitz where he states that a recession began 4 months ago. You can read Short’s latest missive on Achuthan and ECRI’s WLI and LEI indicators, which have had little utility for investors over the past year.
I would have to agree with Short on this one. Achuthan has been beating the recession drum for over year now. We need to put Achuthan’s call in the “broken clock is right at least twice a day” category. He will be right, but it is just a matter of when.