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Anxious Index: No “Double Dip”, Economy Improving at Trader’s Narrative

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:

ECRI cycle David Rosenberg Jun 2010
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:
anxious index long term chart Jun 2010
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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5 Responses to “Anxious Index: No “Double Dip”, Economy Improving”  

  1. 1 BO

    Babak, Thank you for your unselfish sharing. I learn more from the blog.

    ECRI growth rate that is not a leading indicator to stock market still is worth of noting.
    When ECRI growth rate is ‘’over-collpasing'’ (like over-sold in breadth indicator), the probability of rebound of economy and stock market is higher. It is time for betting on upward primary trend in stock market.(Of course , trading with other indicator for further confirmation is even better.) It is a effective tools to determine the risk to reward ratio. After all, in the trading world, fund management(or risk management), the risk to reward ratio and emotion control is everything regardless of adoption of different methodology.

  2. 2 Scones

    I don’t think this one will be especially helpful for the future since recessions will now be more frequent than in the past since we are now in the process of deleveraging.

    These economists will be “taken by surprise” since in the past there has been more recovery time in between recessions. We’ll probably be in a shallow recession by the third quarter after a virtually no growth second quarter.

  3. 3 Scones

    One more item, look how it was not predictive for the last double dip we experienced in 1981-1983. If we are looking for a double dip now, shouldn’t we give more weight to it’s predictive value with last double dip?

  4. 4 Doctor Stock

    Interesting post… glad I dropped by today. It’s interesting to look at some stocks that have not been beat up by the recent woes… such as NFLX or SAM to name two. I’m placing my money in these stocks that continue to have growing revenues and sales… I’m less concerned about the overall market conditions.

  5. 5 Caroline Beard

    Why are all these comments from seven weeks ago? How do any apply to what happens in the future. I am new to reading these articles and need some help since I am now trying to pay attention to the forces that affect the economy.

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