Has A Recession Already Begun?
A recession began sometime in the second or third quarter, according to John Hussman. We respect his opinions and take this comment seriously. How does he know? Like many economists, he uses what are known as economic "indicators." Since different economists focus on different indicators, in different combinations, let's sort out the basics here to gain a better understanding of how and why Hussman concludes that a recession has begun.
Keep in mind that it takes 6 - 12 months after the start of a recession for one to be "officially" declared. Just as it is difficult, if not impossible, to determine or "call" the top or bottom of a specific market trend (e.g., stocks), or an individual security, so too it is almost impossible to determine the exact top or bottom of the business cycle.
As defined by Investopedia.com, the business cycle is "the recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough, and recovery." The data used to measure economic activity are typically revised up or down months after originally reported.
As we previously discussed, these revisions can be quite dramatic. For example, May through August 1990, the Bureau of Labor Statistics, reported a gain of 480,000 jobs only to have that number revised to a loss of 81,000. More recently, early in 2008 even though the U.S. was already in recession, first quarter GDP was announced at +1%, but was later revised to -1.8%.
Leading, coincident, and lagging indicators are used to describe the current state and possible future direction of the "business cycle." When interpreting various economic indicators, it is important to remember that there are no fixed number of indicators, or any proven formulas, for interpreting sets of indicators that are used or followed by everyone. If there were, then it would merely be a matter of plugging numbers into some software program to be able to predict the timing of a coming recession or the end of one.
Hussman has developed his own set of indicators which over time, and in certain combinations, have helped him to not only anticipate recessions, but also to estimate their beginning as well as their end. In addition, he uses the data published by ECRI (Economic Cycle Research Institute), one of the more reliable and accurate sources, to which we have referred in the past.
Throughout 2012, Hussman has reported leading economic indicators, used to predict market trends, to be in a negative trend. Most recently, coincident economic indicators now point to the weakness observed in leading economic indicators. A "coincident" economic indicator is an economic factor that varies directly with the business cycle, thus indicating the current state of the economy. After peaking in July, the following coincident economic indicators all declined in their latest reports: industrial, production, capacity utilization, real disposable income, real personal consumption, retail, and food service sales.
Lagging indicators change after the economy has already begun to follow a particular trend. That's why, for example, any indication that unemployment has declined recently would not be an argument against a recession, since employment is a lagging indicator and would only show deterioration after the recession begins.
Given the clear trend Hussman sees in leading and now coincident indicators, he has made a definite call that a recession has already begun.
Keep in mind that it takes 6 - 12 months after the start of a recession for one to be "officially" declared. Just as it is difficult, if not impossible, to determine or "call" the top or bottom of a specific market trend (e.g., stocks), or an individual security, so too it is almost impossible to determine the exact top or bottom of the business cycle.
As defined by Investopedia.com, the business cycle is "the recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough, and recovery." The data used to measure economic activity are typically revised up or down months after originally reported.
As we previously discussed, these revisions can be quite dramatic. For example, May through August 1990, the Bureau of Labor Statistics, reported a gain of 480,000 jobs only to have that number revised to a loss of 81,000. More recently, early in 2008 even though the U.S. was already in recession, first quarter GDP was announced at +1%, but was later revised to -1.8%.
Hussman has developed his own set of indicators which over time, and in certain combinations, have helped him to not only anticipate recessions, but also to estimate their beginning as well as their end. In addition, he uses the data published by ECRI (Economic Cycle Research Institute), one of the more reliable and accurate sources, to which we have referred in the past.
Throughout 2012, Hussman has reported leading economic indicators, used to predict market trends, to be in a negative trend. Most recently, coincident economic indicators now point to the weakness observed in leading economic indicators. A "coincident" economic indicator is an economic factor that varies directly with the business cycle, thus indicating the current state of the economy. After peaking in July, the following coincident economic indicators all declined in their latest reports: industrial, production, capacity utilization, real disposable income, real personal consumption, retail, and food service sales.
Lagging indicators change after the economy has already begun to follow a particular trend. That's why, for example, any indication that unemployment has declined recently would not be an argument against a recession, since employment is a lagging indicator and would only show deterioration after the recession begins.
Given the clear trend Hussman sees in leading and now coincident indicators, he has made a definite call that a recession has already begun.
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