The Recession is already here---ECRI: The 2012 Recession By Jeff Harding, on September 14th, 2012

ECRI: The 2012 Recession

By Jeff Harding, on September 14th, 2012

The Economic Cycle Research Institute (ECRI) came out yesterday with a defense of its much criticized recession call. As readers know I am cautious about their calls mainly because they use a “blackbox” proprietary methodology which is kept secret by them (in order to justify their high fees). But they have an extraordinary record. And DoctoRx is a big fan of theirs. So I am reproducing their entire piece which is free to us, the great unwashed nonsubscribers (Thank you, ECRI). I agree with their call. My take is that we never really emerged from the original economic collapse since the Crash of ’08, despite the NBER official methodology of gauging recessions.

The 2012 Recession: Are We There Yet?

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.

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.