It has been almost a year since we predicted a recession. Back in December, we went on to specify the time frame for it to begin: if not by the first quarter of the year, then by mid-2012. But we also said at the time that the recession would not be evident before the end of the year. In other words, nine months ago we knew that, sitting here today, most people probably would not realize that we are in recession – and we do believe we are in recession.

Think back to four years ago in 2008, a couple of days before the Lehman failure. Looking at the data in hand, you would see GDP growth at about 1% in Q1 and 3% in Q2. More specifically, Q2 GDP growth had just been revised up on August 28 from 1.9% to 3.3%, sparking a 212-point Dow rally that day.

In an interview featured in a recent issue of Bloomberg Businessweek Chairman Greenspan was asked whether anything during the financial crisis had changed his worldview the way Ayn Rand had decades ago. He said, “Yes, of course,” recalling the day before the Lehman collapse when he had said that recession was probably coming – not that it was already nine months old. At the time, he was far from alone in his view. When asked if that mistake had been humbling, he replied, “Indeed.”

In our experience, too, monitoring business cycles is often humbling.

In March 2001, 95% of economists thought there would not be a recession, but one had already begun. And we do not recall anyone outside our shop predicting the 1990-91 recession beforehand.

Hardly any economists recognized the severe 1973-75 recession until almost a year after it started. Indeed, that recession began with the ISM at 68.1, and payroll jobs growth did not turn negative for eight months.

In 1970, unaware that the economy was nine months into recession, none other than Paul Samuelson said that the NBER had worked itself out of a job, meaning that improved policy expertise had made recessions very unlikely.

The key point here is that it is really difficult to know that a recession has already begun – until long after the fact.

But what data supports our recession call? We just discussed what GDP had looked like four years ago. Please note that for each of those two quarters GDP growth has since been revised down by two to three percentage points. Those are huge revisions.

Likewise, GDP growth prints for each of the first two quarters of the two prior recessions were revised by about two to four percentage points. The takeaway is that, in the early stages of recession, the data are almost always revised down, and the revisions tend to be quite substantial near business cycle turning points.

 


Chart courtesy of DShort

 

Knowing this, how should we feel about the current GDP estimates that average less than a 2% pace for the first half of 2012, i.e., weaker than first-half GDP growth looked four years ago? Please remember, by that time, in September 2008, the economy had already spent nine months in recession.

In the current cycle retail sales have already peaked back in March 2012 and, according to the household survey, employment has declined for the last two months, and for four of the last six months. Mind you, the household data is revised a lot less than the payroll jobs data and also tends to lead it a bit at cycle turns. (While the jobless rate, calculated from the same data, is yet to turn up in this cycle, that is mostly due to people dropping out of the labor force.)

Since July, when we highlighted the weakness in personal income growth, there have been revisions showing even weaker income growth going back a few months, followed by some apparent recovery recently. As with some of the other coincident data, this series will come under significant revision in the months (and years) ahead. Nevertheless, the weakness in income growth is showing through in retail sales data, which, as mentioned, has actually declined since March.

Many point to the stock market being at new highs as evidence that there is no recession. But as people have learned over time, the market is not just about the economy. That is one reason we forecast business and inflation cycles around the world, but we do not make market calls.

Consider the facts. In three of the last 15 recessions – specifically, in 1980, 1945, and 1926-27 during the Roaring Twenties – stock prices remained in a cyclical upturn. Of course, in 80% of those 15 recessions there were cyclical downturns in stock prices. So, while recession does mean high risk for equities, it does not guarantee a stock price downturn. Then there is the worst recession in the last 100 years, when stock prices peaked only after the recession began in August 1929. No doubt, equities have done well in recent months, but is that because of the economy’s strength, or is it about central banks?

While the new U.S. recession is ECRI’s most high-profile call, we have made a number of other key forecasts this year. In April, we predicted an upturn in U.S. home price inflation, as well as a downturn in global industrial growth – and we have been consistently pessimistic about Chinese growth all year.

Some believe that our own Weekly Leading Index contradicts our U.S. recession call. This is not the first time that charge has been made. Recall that, a couple of years ago, people said that its movements guaranteed a double-dip recession. At the time we flatly and correctly rejected that interpretation. Today we can tell you that the Weekly Leading Index is not pointing to recovery and, more importantly, this is also the message from our full array of leading indexes.

For the U.S., the economy is recessionary despite all of the extraordinary efforts by the Fed over the past four years. In that sense, one might argue that, as far as the economy is concerned, the Fed’s actions have become increasingly ineffective. The plunge in the velocity of money to record lows tells us that the Fed is pushing on a string – so no matter what they do there will only be limited traction. Basically, the recession has to run its course.

 

 


Chart courtesy of DShort

Category: Economy, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

11 Responses to “The 2012 Recession: Are We There Yet?”

  1. gloeschi says:

    According to LA’s bio, he received undergrad in 1989 and graduated in 1991. Since he is also the co-founder of ECRI, he must have founded it before graduating in order for “our shop predicting the 1990-91 recession beforehand”.

  2. ironman says:

    Two more indications: layoffs and dividends in the U.S.

    Still, all these contemporary results are also consistent with what we’ve been forecasting since 2011: a “microrecession” in 2012-Q2. We continue to expect to see the economy bounce back a bit in 2012-Q3. 2013 however will be a different story….

  3. Greg0658 says:

    I went to this graph yesterday from a “Reads” outlink .. I search the site to no avail for what is “Industrial Production” (in their mind) .. is tv show creation IP – how about a movie from Hollywood – or a song from Nashville?

  4. wally says:

    I predict a recession, too.
    I’ll just fill in the date later.

  5. JoseOle says:

    Barry: You really should rethink giving Achuthan a wider audience. Anyone incapable of admitting he was wrong does not deserve your readers attention. His interviews on Bloomberg TV, Bloomberg Radio and CNBC from around Sep. 30, 2011 are there for anyone to replay. In no way did he imply that he was allowing for a mid-2012 start to the recession.

    ~~~

    BR: Not remotely applicable, because
    1) He already has a huge audience;
    2) His long term track record is outstanding

  6. JoseOle says:

    >> His long term track record is outstanding

    Not anymore. Again, I encourage you and anyone else to watch his Sept 2011 interviews. I’ll even provide the links:

    http://video.cnbc.com/gallery/?video=3000048636

    http://www.bloomberg.com/video/76372300-economist-says-u-s-recession-is-inescapable.html

    Someone please tell me where he suggests the recession he’s calling could start as late as mid-2012.

  7. boveri says:

    I am grateful to see this ECRI commentary. He may well have it right and if we get more major industrial and transportation companies warning besides, Caterpillar, Fedex and Norfolk Southern, it will justify the stock trimming we were treated to today.

  8. [...] Wonks Why the US is already in a recession – Lakshan Achuthan [...]

  9. [...] renewed efforts by the Federal Reserve to boost the economy and signs of a housing market rebound, Lakshman Achuthan makes the case that the US has already entered the next [...]

  10. [...] renewed efforts by the Federal Reserve to boost the economy and signs of a housing market rebound, Lakshman Achuthan makes the case that the US has already entered the next [...]