Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute (ECRI), talks about the U.S. economy and his recession call with Tom Keene on Bloomberg Television.
ECRI Sticks with US Recession Call
Next, please consider some charts and text from the ECRI publication The Great Recession and RecoverySince ECRI itself has never used WLI growth going negative as as a recession signal, it is important that such “false alarms” are attributed not to ECRI or even to the WLI, but to what is a mistaken interpretation of the WLI.
In fact, at the very least, ECRI itself would need to see a “pronounced, pervasive and persistent” decline in the level of the WLI (not merely negative readings in its growth rate) following a “pronounced, pervasive and persistent” decline in ECRI’s U.S. Long Leading Index (not discussed in the article), before it makes a recession call.
ECRI Weekly Leading IndexGot That?
"This is an index that’s been around for over a quarter of a century, and over that time (shown here) it has correctly predicted every recession and recovery in real-time."
I need to repeat that, over this entire time period, I was present to see each of the correct recession and recoveries calls in real-time, without false signals in between.
"Wall Street is Little More than Glorified Crack House"In recent months, we've observed a fairly neutral flow of economic data - not strong by any means, but offering a reprieve from the clearly negative momentum that we observed in late-summer. ...
In our view, it is very difficult to obtain useful views about economic direction using the standard "flow of anecdotes" approach that is the bread-and-butter of many analysts. The economic data reported daily are a mix of leading, coincident and lagging indicators, often noisy and subject to revision, and without any overall economic structure. Adjusting one's entire economic views following each report, as if each somehow adds significant information, is a recipe for confusion. Treating economic data as a flow of anecdotes, without putting any structure around them, is why the economic consensus has failed to ever anticipate an oncoming recession.
We use a variety of methods to gauge recession risk. The most straightforward is to form fairly low-order indicator sets like our Recession Warning Composite (see November 12, 2007, Expecting A Recession ), that have a long historical record of accurately distinguishing recessions.
As of last week, a simple average of 20 of these binary recession indicators continued to show a preponderance of signals still in place - a condition that has never been observed except alongside a U.S. recession.
Moreover, we can select random subsets of these indicators across random periods of time, in order to make the model less sensitive to exactly how it is put together. That method typically produces more variation in the overall conclusion about the economy, so the confidence in that conclusion is particularly strong when multiple models agree.
At present, we observe agreement across a broad ensemble of models, even restricting data to indicators available since 1950 (broader data since 1970 imply virtual certainty of recession). The uniformity of recessionary evidence we observe today has never been seen except during or just prior to other historical recessions.
San Francisco Fed Calculates 50% Chance of RecessionWe represent the Lollipop Guild
Frankly, I am concerned that Wall Street is becoming little more than a glorified crack house. Day after day, the sole focus of Wall Street is on more sugar, stronger sugar, Big Bazookas of sugar, unlimited sugar, and anything that will get somebody to deliver the sugar faster. This is like offering a lollipop to quiet down a 2-year old throwing a tantrum, and expecting that the result will be fewer tantrums.
What we have increasingly observed over the past decade is nothing but the gradual destruction of the ability of the financial markets to allocate capital for the benefit of future growth. By preventing the natural discipline of the markets to impose losses on poor stewards of capital, and to impose interest rates high enough to force debtors to allocate the capital usefully, the world's policy makers are increasingly wrecking the prospects for long-term economic growth. The world's standard of living (what we can consume for the work we do) is intimately tied to its productivity (what we can produce for the work we do). That productivity requires our scarce savings to be allocated to productive physical capital, and to productive human capital (primarily education).
Nietzsche famously said "What does not kill me makes me stronger." The corollary is "What constantly rescues me makes me weaker." The world will only stop looking for bailouts when policy makers stop handing them out.
San Francisco Fed Understates Problems in US and EuropeGathering storms across the Atlantic threaten a U.S. economy not yet recovered from the last recession. The September Economic Outlook from the Organisation for Economic Co-operation and Development (OECD) indicates that growth prospects have significantly dimmed for major industrialized economies (OECD 2011). Growth in the G-7 countries is expected to remain below 1% for the rest of the year, while the odds of a contraction are fifty-fifty.
The American business cycle in international context
Fluctuations in U.S. economic activity sometimes have an international component. The oil crises after OPEC’s oil embargo in 1973 and the Iranian revolution in 1979 engulfed a large portion of the global economy. Although financial crises in advanced economies are rare, they can leap continents and borders with tremendous facility, as we learned in 2008. It is tempting to think that such contagion is a modern phenomenon. However, using a data set spanning 140 years, Jordà, Schularick, and Taylor (2011) have identified five such financial crises. In each case, 9 to 10 countries out of a sample of 14 advanced economies were dragged into the financial maelstrom. Will the European sovereign debt crisis evolve into one of these events? If so, what would be the risks to the U.S. economy?
Calculating recession odds due to domestic and external factors
Figure 2 shows our updated recession probability forecasts. The thin red line shows the LEI-based predictions we calculated in 2010, which run until 2012. The black dashed line shows the LEI-based predictions using data through August 2011 and extends until mid-2013. The dotted green line shows the predictions based on international CLI data released through July 2011. The thick blue line displays the odds of recession based on combining the lines based on domestic and international factors.
In the next few months, the odds of recession due to domestic factors appear reasonably contained. Those odds increase gradually and reach about 30% in the second half of 2012, after which they decline. However, the curve reflecting the international odds suggests more imminent danger to the economy, although this threat is harder to calibrate using historical data and only indirectly reflects the health of the European financial system. Recession odds based on international factors peak at about 45% toward the end of 2011, but decline rapidly thereafter.
The combination of these two recession coins, shown in the combined risks line of Figure 2, is quite disconcerting. It indicates that the odds are greater than 50% that we will experience a recession sometime early in 2012. Because the international odds of recession are more imprecisely estimated, one must be careful with a strict interpretation of this result. But the message is clear. Prudence suggests that the fragile state of the U.S. economy would not easily withstand turbulence coming across the Atlantic. A European sovereign debt default may well sink the United States back into recession. However, if we navigate the storm through the second half of 2012, it appears that danger will recede rapidly in 2013.
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