ECRI Sticks with US Recession Call
Link if video does not play: U.S. Economic Outlook, Labor Market
Partial Transcript
Keene: You had a recession call. What happened?
Achuthan: It's happening.
Keene: Too many economists are talking 3% GDP.
Achuthan: First off, I talked to you September 30th right here. I made the recession call, two months ago. A lot of economists since then, as they always do are focused on incoming data, a lot of which is coincident or short-leading, and indeed there absolutely has been stronger coincident and short-leading data. ... What we have learned from that is the recession did not begin in Q3. I do not know about Q4.
Keene: Amateurs look at the timing of the call. The pros look at the vector or direction of the call. You maintain the direction of the call.
Achuthan: We have not switched our call. If there is no recession in Q4 or first half of 2012 then we are wrong. You will not even know if we are wrong until a year from now. ..... So far we are talking about coincident data, production and jobs. Forward looking data since I saw you two months ago has remained weak, and is getting weaker. To my fellow forecasters out there, I'd say they are roughly in two camps. There are those who say the economy is firming and will continue to firm into next year. We reject that. There is nothing here to suggest that at all. There is a larger camp that says we are going to "muddle through" with slow growth. I would point out that has never happened. We never "muddle through".
ECRI Has This One Nailed
I think Achuthan and the ECRI have this forecast nailed. My problem with the ECRI is two-fold.
- It does not disclose its "black-box" methodology
- It trumps up its indicators as if they have never missed a call
Problem number one is easily explained. The ECRI sells a service and it does not want anyone figuring out precisely what it is doing.
Problem number two is serious. The ECRI claims its WLI has never missed a recession call. However, the facts show the ECRI has indeed blown recession calls and its own commentary proves it.
Please consider some excerpts from ECRI's Lakshman Achuthan Still Blowing Smoke
Note this statement by Achuthan to the Wall Street Journal.
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.
Look at that last panel carefully. The ECRI claims the WLI "has correctly predicted every recession in real time" while also stating "ECRI itself has never used WLI growth going negative as as a recession signal."
But wait. There's still more ECRI hypocrisy.
Flashback November 2007 ECRI Vol. XII, No. 11: Weakness In Leading Indicators Not Yet Recessionary
Please consider the following image snip. Highlighting is mine.
The ECRI persisted for months the recession was avoidable. In January 2008 the ECRI said there was a "window of opportunity". In March of 2008, months after the recession started, the ECRI finally threw in the towel and relented, calling it a "recession of choice".
Please see A Look at ECRI's Recession Predicting Track Record for numerous details.
The idea the US could have prevented a recession in January of 2008, as the ECRI claimed is stunningly preposterous, as is the ECRI lie that the WLI has a perfect track record.
ECRI Track Record is NOT perfect
As I said (and more importantly have proven), the ECRI's track record is not perfect. Nor is mine or anyone else's. All Achuthan needs to do is stop pretending the ECRI is perfect, and I will stop bringing this matter up.
That said, I will reiterate that it is highly likely the " ECRI has this forecast nailed". Moreover, John Hussman at Hussman Funds agrees.
Estimated Probability of Recession Over 80%
On December 4, in Have We Avoided A Recession? Hussman takes a crack at predicting the odds of recession.
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. ..."Wall Street is Little More than Glorified Crack House"
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.
My favorite part of the article is not the recession prediction odds but Hussman's accurate rant at the end.
We represent the Lollipop GuildSan Francisco Fed Calculates 50% Chance of Recession
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.
In yet one more look at recession chances, please consider Future Recession Risks: An Update by the San Francisco Fed.
Gathering 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.San Francisco Fed Understates Problems in US and Europe
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, Jord�, 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.
I believe the San Francisco Fed significantly understates the problems in the US economy. Moreover, the SF Fed even more seriously understates the problems in Europe. Finally the SF Fed does not address the numerous problems in China at all.
Europe is in recession right here right now. That European recession probability approaches 100% in my opinion. Worse yet, various austerity measures imposed on numerous European countries ensures the recession will be long and deep. Numerous tax hikes in Italy, Europe's third largest economy compound the problem greatly. For a few details of Europe's problems please see ...
- Monti's "Save Italy" Package Sure to Cause "Super Recession"
- Moody's Downgrades French Banks Again Citing Significant Deterioration in Liquidity and Funding Conditions; EU Banks Must Raise $153 Billion of Extra Capital; Banks Running to Stand Still
- Monetary Flight; European CEOs Move Cash to Germany; Spanish Companies Expect Return to Peseta; Expect Capital Controls
The China Factor
China's manufacturing PMI plunged to a 32-month low of 47.7 and is in contraction. China's real estate sector is in shambles. Chinese demand for commodities will drop, putting pressure on exporters like Australia and Canada. Global trade will suffer.
In short, the ECRI Sticks with its US Recession Call, So Does John Hussman, and so do I for numerous US and global reasons.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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