Despite the ongoing recession call by the ECRI, the U.S. economy continues to march forward from the depths of 2009 and, to the surprise of many, even accelerated this year—a strong reason why the stock market has also performed well. The question is, where do we go from here?
Currently, in surveying both the coincident and leading economic data below, there still doesn't appear to be a recession on the immediate horizon. Furthermore, we may actually see GDP accelerate in the present quarter, which would be favorable for the U.S. stock market.
Economy Firing on all 4 Cylinders
Perhaps one of the best indicators of national economic activity is not the widely followed Gross Domestic Product (GDP) report which comes out with a multi-month lag, but rather the Chicago Fed’s National Activity Index (CFNAI), which is a leading index of 85 monthly indicators covering four broad categories of data: 1) production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories.
While most of the four components weakened into the end of 2012, all four components jumped in January and have pulled the three month moving average of the data series well above the key -0.70 recessionary threshold, as seen below.
Source: Bloomberg
While many economic bears grabbed hold of the 0.13% annualized growth rate for the fourth quarter of 2012 to make their recession call, the rise in the CFNAI argues that GDP may actually accelerate in 2013 rather than slip into negative territory.
Source: Bloomberg
Other national economic indicators also point to a low likelihood of the U.S. being in or near a recession. The Philadelphia Fed’s State Leading Index is well above negative territory and corroborates the message of the CFNAI: a recession in the U.S. is neither present nor imminent.
Source: Bloomberg
The Philadelphia Fed also constructs an index that measures economic activity of each state. By looking at a diffusion index of state data we can see how robust economic activity is across the country. As seen below, only dips into negative territory are a cause for concern and at a reading of 72% we are far from nearing recessionary levels.
Source: Bloomberg
The message from the Conference Board’s Leading Index as well as the S&P 500 also signal that a recession is not imminent. The Conference Board’s Leading Index has peaked prior to all of the last 8 recessions and a strong stock market is also not the hallmark associated with recessions.
Source: Bloomberg
Zooming in on the last decade shows how both the Leading Index and the S&P 500 peak prior to recessions. Currently, however, both series are hitting fresh multi-year highs.
Source: Bloomberg
Summary
A host of coincident and leading economic indicators along with a strong stock market suggest the risk of a near-term U.S. recession is currently low. While GDP came in at a disappointing 0.13% annualized growth rate in Q4 of 2012, the CFNAI suggests GDP should move upward in Q1 2013. As long as the economy holds up and systemic risks from Europe remain contained, the risks of a bear market remain low and corrections are more likely to be buying opportunities than the start of a bear market.
