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Yesterday we looked at the decline in the ECRI’s Weekly Leading Indicator and what it means for the market. For many, the ECRI’s fall has galvanized into a bearish signal for the stock market. This, even though a frustrated Lakshman Achutha, Managing Director of the Economic Cycle Research Institute, tried his best to calm everyone down on CNBC with Kudlow and on the WSJ (comment section).
Perhaps it has to do with Albert Edwards belief that in a secular bear market, cyclical bull markets are synchronized with swings in the economy. Or maybe it is the arguments from David Rosenberg:
Hat tip: Barry Ritholtz
Or perhaps it is a reflection of the gloomy sentiment pervading the Street and a convenient way to be an intelligent pessimist these days. Whatever it may be, as promised yesterday, here is a reliable metric to help us gauge whether we are indeed headed towards a “double dip”.
It is informally known as the Anxious Index. In reality it is a quarterly forecast of economic activity by a select group of professional forecasters. I know it may seem strange for someone who normally uses surveys as a contrarian measure to take one on face value but click on the previous link to find out the details about this survey and why it is different.
Click to see larger chart in a new tab:
Source: Federal Reserve Bank of Philadelphia
Most recently it peaked in late 2008 at 75% and has since declined to a low of 9.8%. This means that the consensus is that there is less than a 10% chance that we’ll see a recession in the next quarter. The probability of a recession for the next 2, 3, and 4 quarters forward has also dropped to very low levels.
In the past, a rise above 30% has been a reliable predictor of recessions. But we are far from that level right now. Needless to say, no indicator or index is infallible no matter how stellar its record. While recessions are declared by the NBER in hindsight (grey bars) you have to remember that the 44 forecasters in this survey were making predictions about the future. This data series is not only one of the longest continuously running economic forecasts, the record of the consensus is very good.
The last time that we had two recessions within a very short time of each other was in the early 1980’s. At that time, the Anxious Index fell to 20% in the second quarter of 1980 but then it rose above 30% in the third quarter as the “Double Dip” arrived. The difference now of course, is that the index is less than half of where it was back then.
The general message of the recent survey is that the economy is on the mend and will avoid a “double dip”. On the downside, the forecasters predict that unemployment will continue to be high: 8.9% in 2011, 8.0% in 2012 and 7.1% in 2013. You can read more at the Philadelphia Fed’s website (see above link).
The next quarterly results are released on August 13th 2010 - so mark your calendar.
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