In a very short period of time, it has become almost unanimous consensus that the US economy is entering a “double dip” or a second recession before it has gotten a chance to recover from the previous one. This is a potentially dangerous situation because the monetary and fiscal policies have all been basically exhausted.
The mentions of “double dip” are all over the media and Google trends shows that people are interested to know more as they search for this keyword on the internet. So we have a spike in attention and concern about this issue.
Whether this is a legitimate concern or not depends on who you ask. If you pay attention to bearish analysts like Albert Edwards of Societe Generale or David Rosenberg of Gluskin Sheff, then yes. But if you listen to the actual creators of the index and the authors of the book Beating the Business Cycle, you get a completely different perspective.
Since this came on everyone’s radar a few weeks ago, Lakshman Achuthan has tried in different venues like CNBC to calm everyone down. Here is a video interview between Achuthan and Larry Kudlow, where he tries to set the record straight. The strain and frustration is even clearer in the more more meaty rebuttal written by the co-founders of ECRI to both the naysayers and the doomsayers, titled “ECRI WLI Widely Misunderstood“. They conclude succinctly that,
A slowdown in U.S. economic growth is imminent, but a new recession is not.
If we ignore Achuthan and Banerji, we still have more than a few other reasons to not automatically conclude that the US economy is headed towards another recession. I already shared with you the Anxious Index, which has a very good track record. It is indicating an improving economy with no recession forecasted in the immediate future. As is MacroAdvisor’s recession probability model.
Another argument is the relationship between the Leading (LEI) and Coincident Economic Indicators (CEI) from the Conference Board. These are competing indicators but provide a similar perspective. As you can see from the chart below, historically, when the LEI year-over-year momentum peaks and starts to turn down, the coincident indicators momentum turns positive, indicating that the economic recovery has taken hold. So while short term momentum may wane in the economy, it doesn’t necessarily presage an imminent recession.
Source: Fidelity Investments
This is very similar to what Achuthan has been trying to communicate. Unfortunately, the creators of the indicator are being drowned out by analysts who have co-opted the indicator to argue for a “double dip” recession.
Recently Rosenberg shared this graph showing that when the ECRI’s WLI is between -5% and -10% the next two quarters of GDP growth average +0.80% - hardly a recession:
Significant declines in the ECRI’s WLI have predicted all but one of the recessions in the US since 1965. But also keep in mind that the WLI fell below zero 17 times without triggering a recession. Most of those were shallow negative incursions quickly followed by a recovery back above zero:
So it is a bit premature to interpret the current level of the ECRI’s WLI as a definite harbinger of a “double dip” when we have not only its own history arrayed against such a knee-jerk reaction but also all the other indicators mentioned above. Of course, that could change if we see the WLI fall to lower levels or sustain itself under the zero line for a prolonged period of time. That may happen but as of yet, we do not have any indication - that I can find - of that scenario.
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