Dwaine van Vuuren's Blog

We have adopted a 5-stage recession alerting mechanism modeled on the Defense Readiness Condition alert posture used by the US armed forces, which prescribes five graduated levels of readiness (or states of alert) and increase in severity from DEFCON 5 (least severe) to DEFCON 1 (most severe) to match varying military situations.

With many parts of the Euro-zone entering or already in recession, and the OECD recently putting Australia, Germany and Italy into recession, one has to wonder if the feeble U.S. recovery can skirt a global recession.

Common knowledge tells us that to forecast recession with some lead (advance warning) means we need to use leading indicators. However a special characteristic of the 50 state-wide co-incident indicators maintained by the Philadelphia Fed allows us to build an early warning system for recessions.

More recently, ECRI has switched from the use of smoothed 6-month growth rates (as calculated by their WLIg growth metric) to annual (52-week) growth numbers of its Weekly Leading Index (WLI) to prop up a recession scenario. The reason cited is “…a widespread seasonal adjustment problem that economists have known about for some time.”

The U.S. Coincident SuperIndex, which estimates U.S economic current growth, is within a whisker of returning to the growth rate normally averaged by the economy after 33 months into an expansion, as shown by the chart on the left.

As of February 2012, the 3-month SuperIndex is reporting a probability of recession around 5.3% while the Headwinds index is reporting zero percent probability of recession in 6-10 months’ time. However you can see from the Headwinds chart that economic headwinds are in a rising trend.