... triggered the business cycle contraction, aka recession, which our SMECT model has been forecasting for several years to occur this year. Following the July spike and August reversals in auto sales, the hurricanes have created a supply-based inflationary "climate shock," which we have previously opined is capping the energy-cost spike in crude oil, natural gas, heating oil and gasoline, as well as a host of other petroleum derivatives. Thus, our work shows the business cycle expansion peaked in July and the business cycle contraction started in August, as evidenced by various composites of coincident economic indicators illustrated here.

Remember the second previous recession that started in July 1990, was triggered by -- but not caused by -- Iraq's Aug 2, 1990 invasion of Kuwait? That "geopolitical shock" occurred at the same time the business cycle leading indicators were peaking, which also led to a recession starting at the same time.

More importantly, our work suggests that the Gulf Coast hurricanes "climate shock" will be layered on a 1 to 2 year severe business cycle contraction, the onset of which was the July peak in the three composite economic indicators charted below.

Click to enlarge

Although we made our call when Katrina hit, the Conference Board (CB) just reported that data yesterday, October 20, including both the August preliminary and revisions for July and their previous month's data. See also the third chart below, which is an update our Six Leading Economic Indicators that forewarned of the start of this business cycle contraction, or recession.

We don't expect the follow-on positive economic boost from rebuilding and re-employment will be enough to cause the composite of coincident indicators to make a higher high during the first half of 2006, since -- unlike current consensus expectations -- that is when we expect the underlying business cycle contraction will be developing most negative impact from a severe slowdown in consumer spending due to several years of excessive debt-based consumption. We also expect declining housing prices (see our Great American Home-Equity Bust forecasts) will exacerbate this second recession during the BAAC Supercycle Bear Market Period, which will be opposite of what they did during the previous or first such recession.

We expect the economy will be eventually recognized by the consensus as having peaked sometime in late 2005. We say "eventually" because the consensus of perma bulls and new bulls will contest all of this with their expected indefatigable denial. And isn't such a positive attitude the most constructive (pun intended) emotional bias? But as the stock market decline becomes significant -- already most of the gains of the past 19 months have been erased -- and especially when it makes new lows, it will then give the trend-following consensus an undeniable bell-ringing musical chairs signal to sell everything risky, but of course, that will be effectively too late to have avoided very significant losses, like what happened in 2002.

As an economic shock don't confuse the Gulf Coast hurricane disasters with the 9/11 "terrorism shock" where the economic recession was already a year old, according to our work. The federal budget was over $200B in surplus (the War on Terrorism hadn't started, which, by the way we had predicted six months earlier – copy of that report available on request) and the Federal Reserve had already brought short term interest rates to their 6% peak. The unprecedented post-9/11 economic stimulus from the massive combination of fiscal and monetary interventions can not be duplicated this time. Through today, we estimate they've used up about half of their anti-cyclical stimulative ammunition.

And don't expect any timing help from the official chronicler of recessions, the National Bureau of Economic Research (NBER), because they only can be expected to confirm the start of the recession well after the fact, primarily because of their politically-correct, self-imposed mandate to absolutely avoid making false positive calls. That's ok for that official declarative purpose, but such belated "information" can't be reasonably expected to help investors who must competitively buy and sell under uncertainty, or only with probability odds.

The timing, and thus impact of economic "shocks," is always an important consideration in economic forecasting and investment decision making. For example, the 9/11 tragedy is still popularly thought to have caused the last recession, but this was, and continues to be, a misinterpretation of the facts. As you know, 9/11 not only occurred six months after the March 2001 official start of the last recession, accordingly to the NBER, but the CB's composite of four coincident economic indicators peaked six months earlier in September 2000 -- see also the other two coincident composite indicators above:

Click to enlarge

This was the usual six months lag after the stock market peaked, so we believed then, and now, that the 9/11 "terrorism shock" occurred one year after the start of the business cycle contraction, or true recession, when it was already well underway.

The massive fiscal and monetary stimulus that immediately followed 9/11 would have otherwise started much later -- and would have been a much smaller amount -- thus allowing that recession to correct more of previous economic excesses. For example, it was the first recession in US economic history where consumers did not collectively reduce their debt, and of course, we all know how they've accelerated borrowing since then, especially by refinancing larger home mortgages and spending huge cash takeouts -- $600B, or 5% of GDP, last year alone! The 9/11 shock did not cause, or even trigger the first recession, like the climate shocks are doing this time, and had it occurred later, the US economy would not be so perilous today.

Bob Bronson
Bronson Capital Markets Research

Click to enlarge

© 2005 Bob Bronson
Editorial Archive

Contact Information
Bob Bronson
Bronson Capital Markets Research
Email