Recession: Mixed Messages

The recession officially began this past January, NBER tells us. With that out of the way, we can all focus on the burning question: When will it end?

There are many clues for pondering the timing of the business cycle. Calling the turning point in advance is never easy, and in fact it’s quite a bit harder these days. The magnitude of the economic and financial ills is to blame. In a perfect storm, when nothing seems to work and the crowd is ever more skeptical, simply locating your hand in front of your face is tough. An additional complication is the Fed’s pre-emptive monetary policy of late. Traditionally, the Fed hikes rates to slow the economy. This time the central bank was cutting rates in anticipation of a recession. For good or ill, Bernanke and the boys are nearly out of rates cuts. That’s a problem if the recession turns out to be longer than usual.

Meanwhile, the usual data suspects for profiling the business cycle are throwing out more than their fair share of confusing signals these days. As Bob Diele of recently advised clients, different economic and financial measures are making different forecasts about timing of the economic contraction. Has it only just begun? Or is it near its end? Or somewhere in between. Depending on the data points one chooses to highlight, all three scenarios look plausible.

Consider the chart below, courtesy of, which was published a few weeks back. If we ignore the NBER’s announcement, a simple review of GDP numbers suggests economic activity peaked earlier this year, perhaps after 2008’s Q2, which posted a 2.8% annualized real rise in GDP. The casual observer might think that Q3’s -0.5% fall in GDP is a good candidate for dating the start of the recession, all the more so since most economists think Q4 will suffer an even bigger decline and 2009’s looking quite weak as well.

Phases of Business

Nonfarm payrolls are making a similar forecast. Year-over-year comparisons of this series have a habit of diving sharply ahead of the trough. The labor market has certainly been weak this year. Diele notes that year-over-year comparisons of nonfarm payrolls tend to coincide with periods when the economy’s at its worst.

The stock market, on the other hand, is sending signals that we’re closer to the cyclical trough, which is to say further past the peak than either GDP or payrolls suggest. As Diele explains, the stock market has a long history of tumbling in advance of the trough. Given the huge losses in equities this year, including recent hefty negative signs for rolling 12-month changes, one could reason that Wall Street is telling us that it smells a bottoming out in economic activity.

Then there’s the spread between long and short rates, which is advising that the economic trough is well behind us and that the recovery phase has begun. Again quoting Diele, the yield curve tends to invert ahead of the trough. With that in mind, what are we to make of the fact that the curve has inverted on and off for several years? The naïve explanation suggests the economy is set to rebound soon. (Don’t hold your breath.)

The above metrics are usually in sync when it comes to identifying where we are in the business cycle, Dieli says. This time, however, there’s quite a bit more variety in the messages. Perhaps that’s par for the course in a year when any number of rules of thumb and otherwise prudent guides have fallen off the wagon. The challenge is figuring out which metrics harbor the faulty signals. For our money, we’re suspicious of the financial spread, which is another way of predicting that the contraction still has a ways to go.

Photo: NoSpinForecast

About James Picerno 900 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

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