In Search Of Smoking Guns

Lakshman Achuthan of the Economic Cycle Research Institute reaffirmed his recession forecast from last September, telling CNBC that “our call stands.” He emphasized that “when you look at the hard data that is used to officially date business cycle recessions, it has been getting worse, not better, despite what the consensus view of an improving economy has been.”

Achuthan emphasizes that several key indicators have been posting slowing annual rates of growth recently. For example, he notes that industrial production’s year-over-year pace was at a 22-month low last month. Personal income growth and the broadest measures of sales are also suffering from declining rates of growth on an annual basis.
He’s right, of course. Disposable personal income’s (DPI) growth has been slowing for nearly two years and the trend surely raising warning flags, as I noted with the update of the December and November data. Industrial production’s slowing growth rate is less pronounced. But as I also wrote earlier this month, after looking at the January report on this series, industrial production increased 3.4% over the previous 12 months, which still compared favorably relative to the rates of growth before the Great Recession hit.
Nonetheless, if the trends in personal income, industrial production, and other crucial economic metrics continue to decelerate, the odds increase that a new recession is approaching. But if that’s fate, it’s not yet an open-and-shut case. There is still an array of strong signals from other corners of the economy, starting with the labor market.
The persistent fall in initial jobless claims, which has pulled the series down to a four-year low as of last week, is a strong signal that the job creation will roll on. History suggests that new recessions don’t begin when new claims are falling by 10% a year, as they have been lately, and private payrolls are advancing by 2%-plus on a year-over-year basis as of last month. This is no trivial issue. If job growth continues to pick up, as it did in January, the trend can help heal the trouble brewing in the personal income data. Indeed, in the chart below, the declining year-over-year percentage change in new claims (green line) looks encouraging and surely represents a strong bit of support for thinking positively.

On the other hand, if the labor market stumbles, recession risk will rise. For the moment, however, the jury’s out, and it still leans toward moderate optimism. Indeed, a broad measure of economic activity via the Chicago Fed National Activity Index isn’t warning of recession. Meanwhile, the Conference Board’s leading index is signaling growth ahead. Maybe it’ll all come apart in the weeks and months ahead, but maybe not. Maybe rising gasoline prices will derail the recovery. Then again, maybe the healing process in the real estate market will throw us a cyclical bone and energy prices will head lower in the months ahead.
Nobody really knows what’s coming. But if there’s truly a recession coming, it’ll soon be clear in the numbers. For now, however, you can still make a case for growth.