David Rosenberg's favourite Recession Indicator Is Interesting But Inconclusive

A few minutes ago I took a quick look at the most popular financial news websites, which includes Business Insider (certainly the most entertaining of the bunch), and I was struck by this headline: DAVID ROSENBERG: Here’s Your Big Red Flag That We Could Be Heading For Recession.

I always find Rosenberg’s chronically bearish commentaries of interest and in this case by the fact that he’s reported to view CAPEX as a recession indicator. The Business Insider website included a chart illustrating the year-over year change in the 3-month moving average back to early 2003. Thus the chart only includes one NBER designated recession on which to evaluate the efficacy of CAPEX as a recession indicator.

Adjacent you can see a tiny version of the BI CAPEX chart.

But I was also arrested by the fact that after the latest durable goods report was released, I had also charted the YoY change the 3-month moving average of CAPEX. It was an interesting chart, I thought, but inconclusive. First, let’s take a look at monthly CAPEX, the popular abbreviation for Capital Expenditures, which the FRED database labels as Manufacturers’ New Orders: Nondefense Capital Goods Excluding Aircraft. The data only goes back to February 1992, but in charting the complete series, my version adds another recession, the eight-month contraction in 2001, to the CAPEX context.

 

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Here is a year-over-year per cent change of the series.

 

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And, finally, the chart below is the YoY of a 3-month moving average of the complete series.

 

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Indeed, the CAPEX monthly data has been negative for six of the last 12 months, and the 3-month MA has been trending down since March of this year.

Ultimately my sense is that this data series manipulation (YoY of the 3-month MA) has an insufficient track record to be considered a definitive recession indicator. N=2 is not enough to make reliable recession probability forecasts. But CAPEX is definitely something I’ll add to my monthly Durable Goods updates:

  • Durable Goods Orders
  • Real Durable Goods Per Capita

The next Durable Goods update is scheduled for October 25th.

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