What America's best economic forecaster is saying.
Could our long national nightmare be over? The economic contraction, this Great Recession, began in December 2007, and there's no apparent end in sight. As the unemployment rate has spiked, analysts have thrown cold water on Federal Reserve Chairman Ben Bernanke's March sighting of "green shoots." The stock market's spring rally has fizzled.
But in this season of doubt, I'm prepared to declare that the recession is really, most probably over. Why? Well, it's not because the economists surveyed by the Wall Street Journal believe it'll end in this quarter. (These guys wouldn't know an economic inflection point if it hit them upside the head. All through 2008, when the economy was contracting, they projected growth for the year.)
No, two of the best and most objective forecasters, who are not connected to investment banks or to the CNBC noise machine, have recently called the upturn. Macroeconomic Advisers, the St. Louis-based consulting firm that compiles a monthly GDP index, reported to its clients Monday that while second-quarter GDP was tracking at negative 0.1 percent (recession), the third quarter was tracking at 2.4 percent growth.
The folks at the Economic Cycles Research Institute agree enthusiastically. It's not because they've detected green pea shoots in Central Park. Rather, it's because we've seen the three P's, says Lakshman Achuthan, managing director at ECRI, which has been studying business cycles for decades and was one of the few outfits to call the last two recessions with any degree of accuracy.
The economic data that get the most play in the news— unemployment, retail sales—are coincident or lagging indicators and historically have not revealed much about directional changes in the economy. ECRI's proprietary methodology breaks down indicators into a long-leading index, a weekly leading index, and a short-leading index. "We watch for turning points in the leading indexes to anticipate turning points in the business cycle and the overall economy," says Achuthan. It's tough to recognize transitions objectively "because so often our hopes and fears can get in the way." To prevent exuberance and despair from clouding vision, ECRI looks for the three P's: a pronounced rise in the leading indicators; one that persists for at least three months; and one that's pervasive, meaning a majority of indicators are moving in the same direction.
The long-leading index—which goes back to the 1920s and doesn't include stock prices but does include measures related to credit, housing, productivity, and profits—hits bottom and starts to climb about six months before a recession ends. The weekly leading index calls directional shifts about three to four months in advance. And the short-leading index, which includes stock prices and jobless claims, is typically the last to turn up.
All three are now flashing green. According to Achuthan, the long-leading index growth rate has been recovering since November 2008, the weekly leading index has been recovering since last December, and the short-leading index growth rate bottomed in February 2009. In sequence, each turned up, "and by April the three Ps had all been satisfied." Sure, corporate profits continue to disappoint, and the unemployment rate is climbing. But for ECRI, which navigates by relying exclusively on its instruments, that's only a part of their picture. They're the Spocks of the economic forecasting crowd—unemotional, uninvested in anything but the logic of what history and their dashboard tell them. "From our vantage point, every week and every month our call is getting stronger, not weaker, including over the last few weeks," says Achuthan. "The recession is ending somewhere this summer." In fact, it may already be over.