Dwaine van Vuuren's Contributions

We have quarterly GDP data for 11 more OECD countries since our last post “World plunges into recession in Q42012“, and there have been some 2nd estimate revisions (such as the U.S).

With the disappointing initial GDP releases for Q42012 from Europe out, the “world” as defined by 41 OECD countries across the globe, has plunged into recession. We define “recession” through two alternative definitions for our comparison, either the presence of a single negative quarter-on-quarter growth or the more traditional two consecutive negative quarterly growths.

It is clear when reading various pronouncements made by the NBER Business Cycle Dating Committee that the two broadest measures of economic activity, real Gross Domestic Product (real GDP) and real Gross Domestic Income (real GDI) are very important in their determinations.

Over the last two months we had Real Retail Sales, Industrial Production, Personal Incomes and Non-Farm payrolls all pushing new expansion highs. The only data not in for December now is Real Incomes.

Very few people realise just how close we came to a recession in the past 12 months, purely on an economic indicators perspective and not counting external risks such as the Fiscal Cliff debate.

Industrial Production was slowed by hurricane Sandy and its growth rate is now in recession territory. Bear in mind, for our “NBER Recession Model of last resort” we use a much faster smoothed growth here than the standard 12-month rate of change and therefore many other studies you observe on Industrial production may not be in recession territory yet.

The latest buzz on the internet is a FRED chart published by the Federal Reserve of St. Louis of Jeremy Pigers’ dynamic factor Markov recession probability index. Its currently jumped from less than 1% to 18%.

The Global Economy is on the brink of a recession with 58% of 29 OECD countries experiencing business cycle contractions. The chart below shows OECD defined global contractions (grey shaded areas) together with the percentage of 29 OECD member countries experiencing slowdowns.

In our “NBER Recession Model – Confirmation of last resort” research note we constructed a co-incident U.S economic composite based on the 4 indicators watched by the NBER, namely Industrial production, Personal Incomes, Retail sales and Payroll employment.

In August 2011, ECRI declared a recession was upon us. If you spend enough time examining their initial proclamations it was literally that a recession was imminent, saying “It’s either just begun, or it’s right in front of us.” Subsequently they revised their call, saying the recession would hit “by mid year” 2012. At that time an array of proprietary leading indicators were in contagion.

The National Bureau for Economic Research (NBER) are the final arbiters of recession dating in the U.S. They take forever to proclaim specific starts and ends to expansions so all the revisions can “work their way through” and they can be dead accurate.

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.