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Why ECRI’s Recession Call Stands

 March 19, 2012 09:57 AM


As the S&P500 breaks through 1400 and the powers that be in Europe assure us that things are just peachy, Lakshman Achuthan of ECRI continues to be downbeat on the US economy still calling for recession before mid year. Yesterday on Barry Ritholtz's Big Picture blog, Achuthan penned an explanation of his recession call. Click here for the original story.

Why ECRI's Recession Call Stands
Lakshman Achuthan & Anirvan Banerji
March 15, 2012

Many have questioned why, in the face of improving economic data, ECRI has maintained its recession call. The straight answer is that the objective economic indicators we monitor, including those we make public, give us no other choice.

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Let's start with the current state of the economy. A couple of weeks ago, we publicly highlighted ECRI's U.S. Coincident Index (USCI). It's important to understand that the USCI isn't a random concoction of data, but rather the gold standard for measuring current economic growth, as it summarizes the key coincident economic indicators used to determine the official start and end dates of U.S. recessions; namely, the broad measures of output, employment, income and sales. So when USCI growth is in a downturn (bottom line in chart), it's an authoritative indication that overall U.S. economic growth is actually worsening, not reviving.

In contrast to the 3% GDP growth widely reported for the latest quarter, year-over-year growth in GDP, after peaking at 3½% in Q3/2010, has basically flatlined around 1½% for the last three quarters. Broad sales growth has followed a similar pattern, while the growth rates of personal income and industrial production have dropped to their lowest readings since the spring of 2010.

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The exception to this weakening pattern is year-over-year payroll job growth, which continued to improve through January, and was essentially flat in February. However, the empirical record shows that job growth typically turns down after downturns in consumer spending growth, not the other way around. Because consumer spending growth remains in a cyclical downturn, we expect job growth to start flagging in the coming months. But the point remains that the USCI, which summarizes the definitive coincident economic indicators – including jobs – indicates declining growth in the U.S. economy.

How about forward-looking indicators? We find that year-over-year growth in ECRI's Weekly Leading Index (WLI) remains in a cyclical downturn (top line in chart) and, as of early March, is near its worst reading since July 2009. Close observers of this index might be understandably surprised by this persistent weakness, since the WLI's smoothed annualized growth rate, which is much better known, has turned decidedly less negative in recent months.


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