Monday, November 10, 2014

Another Recession Caller

by Bill McBride on 11/10/2014 11:42:00 AM

Barry Ritholtz tweeted this morning: "Forcaster who was wrong about recession in 2010 sees recession in 2015" and included a link to this article from Bloomberg: Predictors of ’29 Crash See 65% Chance of 2015 Recession

“Clearly the direction of most of the recent global economic news suggests movement toward a 2015 downturn,” chairman David Levy told clients in an Oct. 23 edition of a monthly forecasting report ... Why the gloom? Levy argues the U.S. and many advanced economies still have balance-sheet excesses exposing them to renewed financial crisis. There is limited room for policy makers to reverse any slump, and low inflation risks tipping into deflation in many parts of the world.
Although there are geopolitical downside risks, and there is the potential for some disastrous political showdown in the U.S. (unlikely), I don't see a recession any time soon.

Of course I could be wrong, but currently I'm not on recession watch!

This reminds me of all those recession calls in 2011 and 2012.  As an example, ECRI called several recessions since August 2011 and all of their calls were wrong.

Part of the problem in forecasting recently is the sluggish recovery has ups and downs, and each down looks like the start of a recession to some models. Another problem is that negative news sells ... and there is an entire industry that sells doom and gloom.  It appears Levy is basing his call on the international showdown, but I doubt that will exert enough of a drag to take the U.S. into recession.

But this does give me a chance to post an update to the recession probability chart from FRED.

St Louis Fed Recession Probability Click on graph for larger image in new window.

This graph is based on research by economists Chauvet and Piger. From Professor Piger's site:
"Historically, three consecutive months of smoothed probabilities above 80% has been a reliable signal of the start of a new recession, while three consecutive months of smoothed probabilities below 20% has been a reliable signal of the start of a new expansion."
This approach is useful for calling a recession in real time (of course, no one thinks the U.S. is in recession now).   Longer term, one of the best leading indicators - residential investment - is still increasing and is still very low, and suggests the recovery will continue.   I think a recession in 2015 is very unlikely.