Another Recession?


An independent macroeconomic research firm, Economic Cycle Research Institute (ECRI), is stubbornly sticking to its contrarian recession forecast despite an improving consensus among most economic forecasters.  Given its track record, ECRI’s call is not to be dismissed lightly.

ECRI specializes in creating composite indexes of economic data.  It was co-founded by Geoffrey Moore, who developed the Index of Leading Economic Indicators and gave it to the U.S. government in the 1960’s.  From 1949 to 1978, Moore was the sole arbiter of U.S. business cycle start and end dates on behalf of the National Bureau of Economic Research.  ECRI has continued Moore’s work, using leading, coincident and lagging indicators to identify economic turning points.

In September 2011, ECRI predicted that the U.S. economy would go into new recession beginning in the middle of 2012.  ECRI’s leading indicators had started to fall, presaging future economic weakness.  Also, ECRI believes the U.S. economy is suffering from 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.”

ECRI was not fazed in predicting a recovery of less than 3 years, citing historical precedent for short expansions.  According to ECRI, nearly 90% of U.S. expansions from 1799 to 1929 lasted three years or less, as did two of the three expansions between 1970 and 1981.

Earlier this month, ECRI confirmed its recession forecast.  The firm’s coincident indicators (bottom line on chart) had joined its leading indicators (top line on chart) in predicting an economic decline.  ECRI’s measures of economic activity are diverging from the official government measures:  “In contrast to the 3% GDP growth widely reported for the latest quarter [Q4 2011], year-over-year growth in GDP, after peaking at 3½% in Q3/2010, has basically flatlined around 1½% for the last three quarters.”

ECRI believes that year over year measures are more reliable than quarterly measures of growth.  The firm mistrusts current seasonal adjustments which have been scrambled by the large declines in Q4 2008 and Q1 2009.  According to ECRI, these precipitous declines were interpreted as seasonal factors, and subsequent seasonal adjustments are over-inflating Q4 and Q1 numbers and penalizing Q2 and Q3 numbers too much.

This skepticism helps to explain why ECRI remains bearish while the economic consensus has turned bullish.  Ultimately it comes down to ECRI indicators: “…can unprecedented, concerted global monetary policy action repeal the business cycle? The objective coincident and leading indexes that we have always monitored are still telling us that it cannot.”

And just to brighten everyone’s day, ECRI adds this cheery note: “Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet.”


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