ECRI Changes Outlook From Slowdown to Recession: Updated with Official Statement at 11:25 AM CST
(Cross posted at Risk and Return)
Okay, I have been sitting on this since Monday, but last week ECRI changed their call from a severe global slowdown to an actual recession here in the US. It was just announced on Bloomberg radio:
He told Tom Keene that a recession is the “overwhelming message coming out of our forward-looking indicators.”
And more ominously: “It is not reversible.”
“The U.S. economy is tipping into a new recession,” he said, adding, “We don’t make these calls lightly.”
He cites “dozens of leading indexes for the U.S.” and “contagion in what is going on among those leading indicators. It’s wildfire, it’s recessionary, it is not reversible.”
The ECRI has been saying since June that a lasting and persistent global slowdown was inevitable and the view has been turning more and more negative. You can see video of Lakshman Achuthan discuss their conclusion in June here, and at the end of August here.
Last Wednesday, the Economic Cycle Research Institute issued its U.S. cyclical outlook, summarized with “Economy on Recession Track – The jury is in, and the verdict is recession.” We look at a lot of things in setting our own expectations, but we’ve found the ECRI to be very useful in confirming or questioning our own conclusions. While the ECRI’s weekly leading index went through a worrisome deterioration in 2010 and concerned us a great deal, ECRI itself never issued a recession warning. Last week, they did.
“Today, we must sound the alarm bells loud and clear. ECRI’s leading indices of U.S. economic activity have turned down in a textbook sequence – first the U.S. Long Leading Index, then the Weekly Leading Index, and finally the U.S. Short Leading Index. Their growth rates are also in cyclical downswings, as are the growth rates of every one of ECRI’s sector-specific leading indexes. Under the circumstances, there is no indication that a reacceleration in economic growth is near at hand.
“In the process of scrutinizing the evidence, we examined every one of these leading indexes to check whether they are in pronounced, pervasive and persistent (three P’s) downturns consistent with a ‘hard landing,’ namely, a recession, rather than a non-recessionary slowdown. After examining the three P’s for all of these leading indexes, we found that the overwhelming majority of their trajectories are currently in recessionary configurations. In practice, such a finding is sufficient to justify a recession call.
“A useful way to summarize the evidence we see pointing to recession is to examine the spread of weakness among the components of ECRI’s U.S. leading indexes of economic activity… In that context, the recessionary decline in a summary measure of numerous reliable leading indicators, coupled with an ominous drop in a broad measure of current economic activity representing facts, not forecasts, constitutes a compelling recession signal.”
We have felt that the chances of a recession were much higher than most not only for now, but as a general feature of the post 2008 crisis US and global economy. At this point we are scratching our heads as to why anyone would assume a recession will not occur in the US and in much of the world economy. While nothing is certain, we believe investors should at minimum consider carefully how much they are willing to see their portfolio decline and make sure their portfolio can stay above that mark should a recession occur.
Update: You can hear the entire interview on Bloomberg Radio here.
Update II: Here is the discussion on CNBC
Abnormal Returns has more thoughts on the call and what it might mean for markets. I think the downside is much further than the average of past recessions due to how far off earnings estimates will be given how stretched profit margins have been.
Here is the official statement from ECRI:
U.S. Economy Tipping into Recession
Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.
ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down – before the Arab Spring and Japanese earthquake – to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.”
Last year, amid the double-dip hysteria, we definitively ruled out an imminent recession based on leading indexes that began to turn up before QE2 was announced. Today, the key is that cyclical weakness is spreading widely from economic indicator to indicator in a telltale recessionary fashion.
Why should ECRI’s recession call be heeded? Perhaps because, as The Economist has noted, we’ve correctly called three recessions without any false alarms in-between. In contrast, most of those who’ve accurately predicted a recession or two have also been guilty of crying wolf – in 2010, 2005, 2003, 1998, 1995, or 1987.
A new recession isn’t simply a statistical event. It’s a vicious cycle that, once started, must run its course. Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator. That’s what a recession is all about.
But how can we have a new recession just a couple of years after the last one officially ended? Isn’t this too short for an economic expansion?
More than three years ago, before the Lehman debacle, we were already warning of a longstanding pattern of slowing growth: at least since the 1970s, the pace of U.S. growth – especially in GDP and jobs – has been stair-stepping down in successive economic expansions. We expected this pattern to persist in the new economic expansion after the recession ended, and it certainly did. We also pointed out – months before the recession ended – that because the “Great Moderation” of business cycles (from about 1985 to 2007) was now history, the resulting combination of higher cyclical volatility and lower trend growth would virtually dictate an era of more frequent recessions.
So it comes as no surprise to us that, with the latest expansion only a couple of years old, we’re already facing a new recession. Actually, such short expansions are hardly unheard of. From 1799 to 1929, nearly 90% of U.S. expansions lasted three years or less, as did two of the three expansions between 1970 and 1981. In other words, such short expansions are unusual only with respect to recent decades.
It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.
Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.