Sunday, July 01, 2012

If We're Not in Recession Now, ECRI Was Wrong


"Tomorrow begins July, meaning that we have arrived at midyear, the point by which ECRI [MP: Self-described as the "world's leading authority on business cycles"] predicted we would enter a new recession.  While we don't have the June data, as of May real income, payrolls, and real retail sales continued to rise, although retail sales are below their March peak.  Industrial production was off slightly in May from its post recession peak in April.

In monthly data released last week, new home sales continued their recent improvement, reaching a 2 year high.  The Case-Shiller index of repeat home sales after adjusting for seasonality still improved slightly for the third month in a row.  Durable goods orders increased although their overall trend is still sideways.  The Chicago PMI remained slightly positive.  Consumer confidence continued to fade.  Consumer spending was flat, but as indicated above consumer income improved."

MP: After summarizing about two dozen additional economic indicators, most of which were mildly positive, neutral, or mildly negative, here the conclusion:

"All things considered, it appears that this summer, like the summers of 2010 and 2011, will likely be the weakest point of the year.  Deflation now should set up a rebound later.  Turning to the title of this piece, while I suspect it will be touch and go for a couple more months, I continue to believe that ECRI's prediction will ultimately be proven wrong."

28 Comments:

At 7/01/2012 10:16 PM, Blogger W.C. Varones said...

It all depends on Zimbabwe Ben.

I think he'll start printing again and keep us out of nominal recession.

 
At 7/01/2012 10:23 PM, Blogger juandos said...

"If We're Not in Recession Now, ECRI Was Wrong"...

Who's 'we'?

The Federal Reserve's latest Survey of Consumer Finances, a triennial survey of American families, said U.S. families' median net worth fell by 38.8 percent from 2007 to 2010, or from $126,400 to $77,300...

These families will be 'recessed' until they can make up some of that loss...

Also note these people will never regain their original wealth if 'benny the printer' goes back into action again...

 
At 7/02/2012 1:21 AM, Blogger PeakTrader said...

U.S. inflation and employment are slowing, the E.U. and China are contracting or slowing, the U.S. is facing the "fiscal cliff," and Obamacare is adding to the uncertainty.

The U.S. housing market is recovering slowly from its deep depression, while the U.S. stock market is holding up from negative investor sentiment.

 
At 7/02/2012 1:47 AM, Blogger Benjamin said...

Let us hope the Fed does get aggressive.

Far from Zimbabwe, we are courting deflation, as indicated by the post.

Why court deflation coming out of her worst recession since the Great Depression?

Benny the Coward (caving in to right-wing nut jobs) is more the description.

Remember, the path to prosperity is cutting the federal budget (including the coprolitic military) and prating more money under guidelines targeting solid growth.

 
At 7/02/2012 9:12 AM, Blogger Jon Murphy said...

Haha oh ECRI. The only firm who has the gall to predict a recession when the economy is accelerating year-over-year.

Although, they are getting crafty. On a recent interview (MSNBC, I think), Achuthan changed the definition of a recession from negative growth to "slower-than-we'd-like growth."

 
At 7/02/2012 9:16 AM, Blogger JJ Butler said...

The scary version is the U.S. might actually be in recession. We never know until hindsight when the revisions come out. Numbers have been weak lately, today included; Hussman called it a month ago. Weal C!

 
At 7/02/2012 9:18 AM, Blogger Jon Murphy said...

Ben:

I hope I don't come off as aggressive, but what would you like the Fed to do? Operation Twist has been continued. The Fed Funds rate can't go lower (short of a negative rate), QE I & II have been minimal successes at best (both accompanied by the predictable slump in stocks and commodity prices immediately afterwards). I just wonder what tools left the Fed has.

 
At 7/02/2012 9:22 AM, Blogger Jon Murphy said...

The scary version is the U.S. might actually be in recession.

No we are not. There is not a single shred of evidence to suggest we are.

Numbers have been weak lately, today included

No they have not. Industrial Production is growing at an accelerating pace. Retail Sales (adjust for deflation and excl autos) are at record levels and growing. Employment is growing at pre-recession rates. If you follow the monthly numbers, they are being reported as being bad, but they are not. For US Industrial Production and Employment, April & May tend to be months when Production/Employment declines from one month to the next. When you listen to the media, you get this messed up narrative that is just plain wrong: normal seasonal decline DOES NOT SUGGEST activity is cooling.

 
At 7/02/2012 9:33 AM, Blogger Jon Murphy said...

Let me provide some commentary written by an actual economist (me), not these poets, priests, and politicians.

Let's start with the obvious:
The monthly data trend is useless as a forward-looking indicator. It is amazing that learned people still talk about it. It provides no useful information.

A recent article talked of the mounting signs of weakness in the US economy and then offered just two items as proof. One was the fact that Industrial Production slipped 0.1% from April to May. The reality is that the decline was within the parameters of normal for May. Everyone would have preferred to see a stronger May number, but the 0.1% decline is livable. In short, there is no need to worry because of the incremental slip in May. It happens. Overall, the year-over-year comparisons are favorable and indicative of more gains in the coming quarters.

There are strong reasons to be optimistic about the future. They include:
A healthy April-to-May increase in Retail Sales
The rise in the Conference Board’s US Leading Indicator
The rise in the ISM’s Purchasing Managers Index
The rise in the Housing Starts annual growth rate

Here is reality. The 11.8% rise the US Industrial Production quarterly moving average, which began in July 2009, is steeper than the 1991-2001 and the 2002-2008 recoveries. The same is true if we use the monthly data trend or the annual moving average. This is a healthy recovery by modern standards; in fact, it is almost as good as the 1983-1990 boom years. The 6.7% gain in the Real GDP monthly data trend is mild, but only slightly milder than the 8.7% gain realized in the 1991-2007 growth period. There were not many complaints about economic opportunities in that earlier run up.

All those who are crying recession are cherry picking data, using imaginary numbers, or just plain foolish.

A few weeks ago, I offered $1,000 to anyone who believed that we were/will soon be in a recession in 2012. None of these doom-and-gloom soothsayers took me up on that offer (including Achuthan who I did have the pleasure to meet). Let that be an example to you about the confidence I have in my numbers, and the lack those do in theirs.

 
At 7/02/2012 11:03 AM, Blogger bart said...

All those who are crying recession are cherry picking data, using imaginary numbers, or just plain foolish.

And if you're incorrect, or using too many "massaged" data points?

Would that my recession prediction algo (which has predicted every recession since 1960 with *zero* misses) wasn't in limbo due to uncertainty about excess reserves in monetary base.

 
At 7/02/2012 11:06 AM, Blogger morganovich said...

deflation?

even cpi is reading positive.

i think he means "disinflation".

that fact that he seems unaware of (or deliberately misstating) the distinction raises some questions about his knowledge (or agenda) of or around price levels.

 
At 7/02/2012 11:17 AM, Blogger morganovich said...

jon-

the ECRI was nearly right in q3-4 2011.

the only reason GDP was above stall speed was how low the deflators were.

deflated at cpi, we were pretty much at stall speed in h2 2011.

a question for you:

i have heard you speak in the past about using cpi +400bp to deflate for real growth.

is that what you are using to get to your claims of "we are not even close to recession"? if i use that number, this looks like a recession.

what are you using as a deflator when you make those statements?

it seems to me that that is is really the pivotal issue here.

if you call inflation 2%, then it looks like we are growing, but call it 6% and we are not (eg if this were 1980, we'd call this set of economic conditions a recession based on cpi/gdp-d of the time)

 
At 7/02/2012 11:23 AM, Blogger bart said...

morganovich:
The last 6 months of CPI adjustments to my beta CPPI:

3.04%
2.99%
3.17%
3.11%
3.16%
3.01%

 
At 7/02/2012 11:27 AM, Blogger morganovich said...

bart-

thanks.

are those the values for your cpi or the amount that needs to be added to the published figure?

 
At 7/02/2012 11:39 AM, Blogger bart said...

Those are the additions to CPI-U. Here's the full CPPI for the same months:

6.04%
5.76%
5.46%
4.71%

 
At 7/02/2012 11:40 AM, Blogger bart said...

Make that CPPI© -g-

 
At 7/02/2012 11:51 AM, Blogger morganovich said...

"All those who are crying recession are cherry picking data, using imaginary numbers, or just plain foolish."

i think bart raises a valid point here.

if i were looking for the most imaginary numbers in all of published data over the last 3 q's, i'd pick gdp-d.

it has been so far under CPI (itself a highly suspect figure) as to have effectively created 90% of the reported gdp growth in the last 3 q's.

gdp d was 2.06 in q3, cpi was 3.74
gdp d was 1.37 in q4, cpi was 3.13


this takes both q's gdp down to sub 1% when deflated with cpi and into negative territory if you use cpi+ more than 100 bp or so.

precisely which numbers are "imaginary" is open to quite a bit of debate.

correct me if i am wrong, but i believe i have heard you mention using cpi+ 400bp jon.

if you do, i do not see how you can get to positive growth figures for the economy.

 
At 7/02/2012 11:55 AM, Blogger morganovich said...

btw, i pulled that 90% number out of nowhere as a rhetorical device, which, upon consideration was a bad choice. i do not know the actual % and it is likely lower than that esp if you include q1.

that said, if you take bart's numbers, whose methodology he explained to me and sounds solid and correct, then we are already in recession and have been since at least q3 2011.

 
At 7/02/2012 12:26 PM, Blogger bart said...

There's also the issue of "massaged" numbers, even with no "tinfoil hat" moments.

Years ago, I got attacked by those who didn't think it was possible that the Fed was manipulating or controlling markets via the various OMOs, etc. Events since then have shown, at the very least, that they're a huge player.

And then we have the quite recent *special* moments about LIBOR, and the glaring evidence of real fraud.

Even today, there was a rather large adjustment to recent data on construction spending, and sooprise/sooprise - they look a whole lot better than they did last month.


Perhaps *massaged* is the wrong word, but fully trusting all the numbers coming out is unwise.

 
At 7/02/2012 1:07 PM, Blogger Jon Murphy said...

Morganovich and Moe-

Before I get into what I want to say, please know I respect both of you very much. You both know a lot of what you are talking about and no one should treat any of your knowledge lightly. I want to apologize in advance if I come off as aggressive or condescending.

Now:

Looking at the data, I see that the vast majority of data series are growing. US Industrial Production (which correlates perfectly with GDP and has the added benefit of coming out monthly as opposed to quarterly) is up 4.7% May 2012 over May 2011. Yes, it declined April-to-May, but that is perfectly normal for this time of year. Furthermore, the previous three months are 4.5% above the same 3 months last year. The annual number is up 4.0% from last year. All those numbers are set to rise.

Retail Sales (deflated, excluding autos) are up 2.5% and rising on an annual basis.

Business to business activity is at record levels at up 8.5%.

The USLI is rising steadily.

This month's PMI number, assuming it is calling for a recession, means any recession won't arrive until mid-2013.

The Chicago Fed National Activity Index is above -0.7, meaning no recession in sight.

US Trade is at record levels and rising.

Wholesale Trade totaled a record $4.8 trillion the past 12 months and is 11.4% above last year.

Employment is adding jobs at pre-recession rates.

AS I have said before, some 900,000 economic data series my company tracks are rising year-over-year.

With all due respect to you two, all you are saying is "you're not deflating enough." Well, I don't see anything to suggest I should. Neither does the BLS, MIT, Federal Reserve, or IMF. Say what you will about those institutions, but there are world-class economists who work there. If they are all running their separate tests and concluding the some message regarding inflation, I have to agree. I am sure your methods are good, but when they are in stark contrast to what the economic data is suggesting, don't you think maybe they should be rethought? Or, at least be supported by additional evidence?

Looking at all my data, I cannot reach any other possible conclusion: the US economy has grown, the US economy is growing, the US economic growth will pick up pace as we progress through 2012. There is no sign of recession in the US before the middle of 2013 (things start to get hazy after that and given recent developments in the political world, a 2014 recession would not surprise me).

A few parting thoughts on GDP:
GDP said 1945-1946 were recession years. The economy grew at an accelerating pace through those years. The 2001-2002 recession did not register on GDP (GDP is virtually flat during that period). The only reason 2001-2002 is called a recession is because corroborating economic factors were declining (employment, the stock market, etc).

I know ECRI is the self-proclaimed leading authority on business cycles. But, for the damnest reason, no one is paying attention to them. I guess self-proclamation doesn't hold weight when you have nothing to back up your claims. Let ECRI keep calling for recessions. They're bound to be right sooner or later.

 
At 7/02/2012 1:50 PM, Blogger morganovich said...

jon-

i see what you are saying, but it seems like a straw man.

you seems to be finessing the key issue which is "what measure of price level change are you using?"

i have asked you this several times and you have not answered me.

please correct me if i am wrong, but i seem to recall your saying you used CPI+ 400bp as a deflator in previous discussions.

if you do so to retail sales, they have been negative yoy since november and gdp has been negative for over 3 quarters if you use cpi+400 or bart's figures or the pre boskin cpi.

i understand the numbers you are looking at, but the issue i (and i think bart as well) are taking is around deflators.

we understand what the bls and bea stats, ism etc are saying, we are just arguing that it is GIGO.

if you understate inflation, it looks like real growth and productivity.

so again, what inflation assumptions are you making?

do you accept the published cpi and gdp-d (which has been way under cpi of late)?

i'm just trying to get at what your assumptions/beliefs are on that as what you are saying here seems different that what i seem (perhaps erroneously) to recall your saying in the past.

 
At 7/02/2012 2:01 PM, Blogger bart said...

AS I have said before, some 900,000 economic data series my company tracks are rising year-over-year.

How many of those stats are US based AND measured in dollars?

You know what I'm driving at... but for those who might not, virtually any stat expressed in dollars that isn't CPI or fully inflation corrected is measuring nothing but money printing - no actual and real gains.



Plus, to address and at least partially debunk just one of the stats and show that it's far from as clear as it sounds from all those stats, productivity was also up a lot in 1936 and 1937... and right before the recession starting in 12/2007, and right before the recession starting in 2001, etc.

Another - the CFNAI was at -.67 only two months before the 2001 recession started.

 
At 7/02/2012 2:02 PM, Blogger morganovich said...

"The only reason 2001-2002 is called a recession is because corroborating economic factors were declining (employment, the stock market, etc)."

i would disagree with this.

the only reason it did not show as a significant recession was that the CPI and gdp-d measurement methodology had changed.

those economic conditions would have looked like a significant recession from q3 2000 all the way to 2003 if deflated using 1990 methodology.

the definitions of recession were created in the pre boskin era. when you change the inflation gauge to read lower, it follows logically that you would need to change the definition of recession as well if you seek consistency, no?

 
At 7/02/2012 2:06 PM, Blogger bart said...

i understand the numbers you are looking at, but the issue i (and i think bart as well) are taking is around deflators.

Yes.


And here's the facts on the last two GDP revisions in nominal (not real) dollars.


GDP revisions

 
At 7/02/2012 2:10 PM, Blogger PeakTrader said...

Jon says: "I offered $1,000 to anyone who believed that we were/will soon be in a recession in 2012."

You'll make more money betting on a recession. However, don't listen to the overblown inflationists, who believe the economy has been contracting for years or decades.

 
At 7/02/2012 3:45 PM, Blogger Ron H. said...

Jon M:

I'm sure moe will accept your apology when he becomes aware of it, even if he doesn't know what it's for, but you may have meant to address bart with your comment.

:)

 
At 7/04/2012 10:28 AM, Blogger VangelV said...

"All things considered, it appears that this summer, like the summers of 2010 and 2011, will likely be the weakest point of the year. Deflation now should set up a rebound later. Turning to the title of this piece, while I suspect it will be touch and go for a couple more months, I continue to believe that ECRI's prediction will ultimately be proven wrong."

The hope is that Ben starts to flood the system with liquidity again and that bond investors will continue to accept the inflation data from the BLS and Treasury.

 
At 7/04/2012 10:34 AM, Blogger bart said...

Health insurance prices increasing at about 13% YoY, even from the BLS

 

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