Saturday, August 22, 2015

On Recession Calls

by Bill McBride on 8/22/2015 09:41:00 AM

Note: CR is on vacation, and I will return on Sunday, August 23rd.

No one is perfect, although in January 2007 I did forecast a recession starting in 2007. And I was able to call the bottom in 2009.

Here are some recent posts on recessions:

From January 2015: Predicting the Next Recession

Recently there has been some discussion of a recession in 2015. That seems very unlikely to me - I'm not even on "recession watch".
From March 2013: Business Cycles and Markets
I've been asked several times about the recent ECRI recession call (obviously I disagreed with their incorrect recession call in 2011 - I wasn't even on recession watch then and I'm not on recession watch now - and I also think ECRI is wrong about a recession starting in mid-2012). ...

It seems to me ECRI is trying to make this an academic exercise and hoping for some significant downward revisions. Right now the data doesn't indicate a recession in 2012, but, as Menzie Chinn notes, "all of these series will be revised, so one wouldn’t want to state definitively we are not in a recession – therein lies the path to embarrassment. But the case still has to be made for recession."

But why do we care? ...

Why is there so much focus on the business cycle? For companies, especially cyclical companies, the reason is obvious – it helps with planning, staffing and investment.

But why are investors so focused on the business cycle? Obviously earnings decline in a recession, and stock prices fall too. The following graph shows the year-over-year (YoY) change in the S&P 500 (using average monthly prices) since 1970. Notice that the market usually declines YoY in a recession.
So calling a recession isn’t just an academic exercise, there is some opportunity to preserve capital.
Note: From June 2015: ECRI Admits Incorrect Recession Call

CR Note: I will be returning tomorrow (unless I change my mind), and I should start posting Sunday evening or Monday morning. Best to all!