Dwaine van Vuuren: Too Early To Call US Recession

Using a nine composite index consisting of:

• The Philadelphia Fed Aurora-Diebold Scotti Business conditions Index (ADS) 
• The Philadelphia Fed Business Outlook Survey (BOS) 
• The Conference Board Leading Economic Index (LEI) 
• The Conference Board Employment Trends Index (ETI) 
• The e-forecasting.com monthly Leading Index (eLEI) 
• The e-forecasting.com monthly GDP series (eGDP) 
• The Institute for Supply Management ISM Report on Business (PMI) 
• The Chicago Fed National Activity Index three-month average (CFNAI-MA3) 
• The ECRI Weekly Leading Economic Index (WLI) 

Dwaine van Vuuren argues the recession call by ECRI was premature.  Although, ECRI does have a one year time horizon on their call.  Based on his U.S. Economic Growth Super-Indexes, there is only a 15% chance of recession as of December 29, 2011.  He goes on to note the chance of recession has risen quite sharply, but similar spikes were observed in March 2003, September 2005, and July 2006.  None of these periods resulted in an NBER-dated recession.

The difficulty in forecasting a recession is obvious from his charts.  The descent into recession is generally quite abrupt.  Many of the indicators in and of themselves are coincident or short-leading making it difficult to know when the economy has reached the end of cliff.  In other words, a coincident or short-leading index won't tell one much more than the stock market.  Consequently, it won't be helpful in avoiding stock market losses.  He provides a few additional graphs which compare the current recovery to past recoveries noting the current recovery is lackluster, and therefore, potentially more prone to falling into recession.  A recession is generally underway when four or more of the nine indexes are in recession territory.  There are currently two in the doldrums now: ECRI Weekly Leading Economic Index and e-forecasting.com monthly Leading Index.  The other seven indexes are currently well below their respective recession thresholds.  

He concludes with a 4-6 month Leading Superindex which currently shows the economy is susceptible to a recession.  However, the current reading is consistent with other periods in which no recession occurred.  His advice: monitor the leading indexes for continued deterioration or rebound.  If it was easy to read the tea leaves, everyone would be on top of the early warning signs of recession risk.  It does appear that the 4-6 month Leading Superindex lends support to the idea that there is, as John Hussman would say, a syndrome of conditions present that have in the past lead to recession. 

Advisor Perspectives: US Recession - An Opposing View