105655519 105644251 lighthouse special report who moved my recession

7/29/2019 105655519 105644251 Lighthouse Special Report Who Moved My Recession

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Lighth

Special Report: Leading Indicator

Posted on September 11, 2012

Lakshman Achutan, ECRI (Econo

on September 30, 2011 (and co

Gary Shilling, according to his A

However, equity markets dont

new all-time high. Only one side

environment. Long bond yields

interest until 2014, and possibly

Usually, central bankers hit the

strong demand and brisk econo

inflation recedes.

But what if the economy went i

already (as seen, for example, in

easily explained by central bank

use Investment Management

s - September 2012

ho moved my recession?

y Alexander Gloy, CIO of Lighthouse Investme

mic Cycle Research Institute) made a recession

firmed it multiple times since then).

gust letter, says We are already in a global re

hink so, with the S&P 500 trading less than 10

can be right. Could this be a repeat of October

S&P 500 hit new all-time hi

weeks before the Great Re

Are so-called leading indica

the Conference Board, still

The adjacent table shows te

indicators (h/t Mish Shedlo

market (#7) is a terrible indi

economic performance. Wh

the yield curve (#9) was a v

indicator in the past, it wou

the yield curve to invert in t

ould have to go negative as the Fed promised

longer.

brakes (raise interest rates) for fear of inflatio

ic growth. The yield curve inverts, a recession

to recession with short-term interest rates bei

Southern Europe)? Over the past 50 years, all

action and oil price shocks:

Page 1

t Management

call for the US

ession.

away from a

2007, when the

hs mere six

cession began?

ors, as used by

eliable?

n leading

k). The stock

cator of future

ile the slope of

ry good leading

ld be difficult for

he current

near-zero

induced by

follows, and

g near zero

ecessions were


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Lighth


The following chart shows how

recessions. Black line: absolute l

prior post-recession low. Right-h

changes (negative absolute num


s - September 2012

he Fed increased interest rates ahead of each

evel of Fed Funds rate; blue line: increase in %-

and scale for absolute data, left-hand scale for

bers merely for better formatting):

Page 2

f the last 9

points from the

percentage


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Lighth


The same logic applies to the cr


s - September 2012

de oil price (log scale):

Page 3


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Lighth


I have looked at many indicator

short-term noise in order to p

Some data do not give good sign

need to be trend adjusted (num

cars and population).

The following indicators have be

was none), missed recessions, t

what it said in H2 2011, the curr

to it for a weighted overall rece

Not all recessions are equal, and

trigger line. Set it too low, and

get a lot of false positives (indi

I have drawn boxes shaded in re

catch all recessions; the bottom

The taller the box, the less confi

between those bands, recession


s - September 2012

from every angle. Some have to be smoothed

event false signals (used mostly 3-months mo

als unless you look at decline from recent pea

er of miles driven, for example, benefits from

en tested for false positives (calling for a reces

e confidence I have in to work in the future, p

ent likelihood of a recession and the importanc

sion probability:

no single indicator is perfect. It is therefore ha

ou will miss some recessions. Position it too hi

ator signals a recession when there is none).

d. The upper end of the box is the highest level

end is the lowest setting necessary to avoid all

ence the indicator deserves. If the read-out is

probabilities are assigned.

Page 4

to cancel out

ing average).

s. Other data

rising number of

ion when there

ssible lead time,

e (1-3) I assigned

rd to draw the

gh, and you will

necessary to

false positives.

somewhere in


5/17

Lighth


At the risk of boring you with de

Want to build a house? Need a

and you can bet on a recession.

level still below the lows of 199

today.


s - September 2012

tails, here are the remaining charts:

ermit! Any decline in permits of 25% or more

Missed the one in 2001 though. 2011 was a clo

/91 recession. Population was 250m then com

Page 5

rom prior peak

se call. Absolute

pared to 315m


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Lighth


UoM Consumer Sentiment: One

back recessions, so lets not be twas a close call, but currently ou


s - September 2012

false positive (2005), one miss (1981). 1980-82

oo harsh about that. Declines of 25%+ indicatet of the woods.

Page 6

were back-to-

recession. 2011


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Lighth


If you run a business you need e

peaks in summer due to air condrops by 1% or more, its a rece

Currently a close call.


s - September 2012

lectricity. Sure, weather has an impact (electric

itioning), but this thing seems to work. If electsion. Limited historic data, but no misses and n

Page 7

ity use in the US

icity usageo false positives.


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Lighth


The CBs Consumer Confidence i

2003), but it did catch all recessiother indicators). 2011 was a cl

trigger recession call in 2013.


s - September 2012

s similar to the UoM Sentiment. Two false posi

ons including the ones in 1981/2 and 2001 (difose call. Currently no red flag. Would have to

Page 8

ives (1992,

icult for a lot ofdecline to 45 to


9/17

Lighth


Retail sales (ex food services) fel

sales for three consecutive monseries began (1947), according t

add a few weak months and the


s - September 2012

l annualized 2.7% over the three months to Jul

hs indicated a recession 27 out of 29 times sinGary Shilling. Year-over-year, the chance is sti

economy would be in the tank.

Page 9

. Falling retail

e the datall positive, but


10/17

Lighth


Before you fire employees you r

hours in the manufacturing sect1996. According to this indicato


s - September 2012

educe their working hours. A drop in average

r of 2% or more indicates a recession. Except, the US economy is currently sailing smoothly.

Page 10

eekly working

or


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Lighth


The Institute for Supply Manage

sales, inventories etc. A level ofweaker business activity (econo

contraction. However, the decli

alarm. One false positive (1989).


s - September 2012

ment (ISM) regularly asks company executives

50 indicates no net balance for participants seey stagnates). The current level (48) points to

e from prior peak is not yet large enough to ra

Page 11

bout orders,

ing stronger andslight

ise recession


12/17

Lighth


Unemployed people usually don

1% per annum, so traffic increas

If total miles driven grow less th

The 2001 recession was missed.

theoretically possible we migh

since 2007 due to online shoppi

shopping and mail order houses

to 9.0% in 2011. However, addit

partially negating fewer trips to

was approximately the same in

of the decline.

The steep drop in 2011 is puzzli

decline in gasoline consumption


s - September 2012

t drive to work. But the US population increas

es constantly.

n 0.1% versus its own trend, you are likely to

This indicator says we had a recession in 2011

t not know it yet). Is the prolonged decline in

g? According to data from the Census Bureau,

amounted for 5.9% of retail sales (ex autos) in

ional trucks are needed to deliver the addition

the mall by individuals. The number of non-far

011 and in 2004, eliminating reduced employ

g. Mish Shedlock recently looked at possible r

.

Page 12

s approximately

e in a recession.

which is

iles traveled

electronic

2004, increasing

l volume,

employees

ent as a source

asons for the


13/17

Lighth


Defense and aircraft orders are l

confidence in this indicator duefalse positive in 1998 and are cu


s - September 2012

umpy and distort trends, so we exclude them

to limited historic data. If you set the trigger atrrently in recession.

Page 13

ere. Medium

0%, we had a


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Lighth


Electricity production should be

many false positives (1983, 199below -0.5% would eliminate fal

electricity production suggests


s - September 2012

linked to economic growth. This indicator, unf

, 1997, 2006), so confidence is medium. Settse positives, but make you also miss 1990/91.

e are in a recession as I type.

Page 14

rtunately, had

ing the triggeregardless,


15/17

Lighth


Finally, the least confident indic

current reading of 48.7 suggests1998, 2005) muddy the water.


s - September 2012

tors. First, the ISM manufacturing supplier deli

a mild contraction. Multiple false positives (19

Page 15

veries. The

85, 1989, 1995,


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Lighth


Cars need gas, and gas needs to

because of high turnover. Lowdata. Can the recent decline be


s - September 2012

be delivered to gas stations. Inventory effects

confidence because of false positive (1996) anxplained by online shopping?

Page 16

re unlikely

d limited historic


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Lighthouse Investment Management

Special Report: Leading Indicators - September 2012 Page 17

SUMMARY: Established leading indicators incorporate questionable input. While there is no

perfect indicator, a combination of the ones tested above, weighed by accuracy, confidence

and timeliness should produce a good reading.

The higher-confidence indicators say that 2011 was a close call, but we are currently not in a

recession. However, a lot of lower-confidence indicators are showing readings consistent with a

severe recession.

It is entirely possible we narrowly avoided a recession in 2011 and are heading towards another

one in 2013. Currently, however, combined indicators suggest only a 10% likelihood of being in

a recession at this point (September 2012).

The US economy is experiencing the slowest recovery of the past 50 years (both from an

employment perspective as well as from GDP growth). After looking at total credit market debt

outstanding I concluded this was due to a decline in the marginal utility of additional debt (see

this post). Some readers have mistaken me for an advocate of more quantitative easing. I

should have been more clear about this: I do not think printing money is an appropriate remedy

for economic woes. Enabling the government to finance fiscal largess at artificially low rates isunlikely to cure problems related to excessive debt levels.

105655519 105644251 lighthouse special report who moved my recession

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