Real Time Recession Indicator: 12.18.12
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. The 2012 signal also was a false signal as the market and economy were saved by more Federal Reserve intervention in the form of QE3.
Figure 1. SP500/ weekly
The Philadelphia Federal Reserve also publishes its own leading economic indicators on the individual US states and an aggregate value for the 50 US states. Figure 2 is a monthly graph of the SP500 with the LEI for all of the US going back to 1980. As can be seen in the graph, the US is currently not recession. More importantly and according to this graph, the indicator is actually within the “sweet spot” for the stock market. The “sweet spot” occurs when the indicator is above a value of 1. For example, the red line overlying the indicator is a 3 month smoothing of the Philadelphia Fed’s leading economic indicator. The green vertical lines are those times that the 3 month smoothed average dipped below a value of 1. 3 out of 4 times a recession followed shortly after as the indicator dipped below the zero line. With the lone failed signal, the indicator quickly recovered after 1 month. The important point: the economy is not in recession nor is there indication that a recession is imminent.
Figure 2. SP500/ monthly
Category: Economic
