Talk about sticking to your guns here – John Hussman still believes the likelihood of recession is very high. It’s a call that he’s been making for a number of quarters now and was clearly influenced by the ECRI’s rather confident recession calls. I wonder what Lakshman Achuthan is thinking about the recent economic data….
As I’ve long been saying, I still think the large budget deficit makes the likelihood of a technical double dip low in 2012, but risks are increasingly high that that could change in 2013 as the budget deficit peels off (I’ve been playing this by ear as quarterly deficit estimates are released). The main point is, we remain in a balance sheet recession which appears to be showing slow healing signs and as long as the government supports the de-leveraging consumer with high deficits the economy is unlikely to experience any sort of substantial decline. I still think my 2013/2014 end date is not far off.
Of course, Hussman is working from a totally different macro framework than I am and I’d be a fool to claim that there’s no chance that he ends up right and that my macro framework falls apart in the coming years given the numerous inputs that could change the outcome. Dr. Hussman elaborates on his current outlook:
“The interpretation best supported by the data is that recession risk remains very high based on the leading evidence and the typical outcomes that have resulted, but that the rate of deterioration has eased significantly, and it is simply unclear whether this is a temporary pause or a reversal. Rather than overstating the case one way or another, we remain strongly concerned about recession risk, but recognise the recent stabilisation and the potential for a low-level continuation of that. On the indicator front, the economic data over the coming week could be informative (especially the introduction of the Conference Board’s revised LEI, the Chicago Fed National Activity Index, and unemployment claims), but if the new data also muddles around near the flat-line, it will essentially reinforce the overall view that the global economy is close to slipping into recession, but is at least temporarily stabilizing.
Importantly, the recession risk we’re observing is evidenced in a wide variety of indicators, various sets which we’ve reviewed in a number of recent weekly comments (see Dwelling In Uncertainty ). For example, the chart below shows three widely-followed leading indicators: the OECD (organisation for Economic Cooperation and Development) Leading Economic Indicator for the total world, the OECD LEI for the U.S., and the ECRI (Economic Cycle Research Institute) Weekly Leading Index growth rate. All are presented in standardized form – zero mean, unit variance. The blue shaded areas are actual U.S. recessions. The yellow brackets depict what we call a “discriminator” – a variable that strongly discriminates between two groups of data, in this case recessions versus expansions. This particular variable shows the points in history when all three of those leading indices were below -0.5 (based on standardized values), and the average of the three was less than -1.0. Recessions have always produced this condition, and this condition has only been associated with recessions. Notably, this discriminator is active at present.
Despite the record of this and other indicators, we have to suspend the inclination to view recession as a certainty. It’s still possible that this instance is different, and that the modest stabilisation we’ve seen in recent economic data will be sustained enough to avoid a recessionary outcome. But in my view, the downside risk is high, and it entirely strains the evidence to say that we can discard recession concerns on the basis of the more comfortable data points we’ve seen in recent weeks.”
As always, Dr. Hussman’s full letter is quite good….