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The Mysterious Case of Recession Risk

The Mysterious Case of Recession Risk
By James Picerno Dec 19, 2011, 10:48 AM Author’s Website

Will the threat come from within or without? Or are we set to be a two-time lower? Perhaps the more pressing question is whether it’ll come at all?

The odds of a new recession appear low to many analysts, but the Economic Cycle Research Institute’s weekly leading index (WLI) is still anticipating a fresh period of contraction. The latest reading of ECRI’s WLI is -7.5, the group reported on Friday. That’s up slightly from the previous week, but it’s not enough of a change to spur a revision in ECRI’s recession call that still stands since it first issued the warning in late-September.

The appearance of a stronger U.S. economy over the past month or so vs. the ongoing recession forecast by ECRI is gaining attention as analysts consider if the improving trends in some of the economic news is misleading us. The latest addition for thinking that there’s no recession coming these days is the weekly initial jobless claims report. Last week’s update suggests that the labor market is strengthening. It’s always dangerous to rely on one number for predicting the economic cycle, of course, but the sharp decline in this leading indicator looks compelling for expecting to labor market to maintain a moderate growth rate if not accelerate.

A new research note from the St. Louis Fed muses: Initial Claims and Employment Growth: Are We at the Threshold? It’s not yet clear, the author concludes, but the possibility of stronger employment growth isn’t beyond the pale. If so, the odds of a new recession appear low.

But ECRI doesn’t agree. The consultancy has a strong record of making cyclical calls, but no one should assume it’s flawless. A complicating factor is ECRI’s black box methodology. One blogger has tried to deconstruct ECRI’s process, but it’s difficult to make any hard and fast conclusions when you’re an outsider looking in. You can find deeper context for ECRI’s process in a book co-authored by two of the firm’s principals: Beating the Business Cycle: How to Predict and Profit From Turning Points in the Economy.

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