Friday, February 15, 2008

recession watch update

My prediction of the chances of a possible recession this year, 50%, posted three weeks ago matched the medium prediction of 55 economic forecasters surveyed by THE WALL STREET JOURNAL in early February. I feel pretty good about this since the medium prediction of these folks has a better track record than any individual forecaster.

What is the latest evidence of a recession? Today the Federal Reserve Board (Fed) released January’s Index of Industrial Production. This is the best coincident indicator of economy. (That is it rises and falls at the same time the economy rises and falls.) It has remained steady since October. While not a perfect indicator, it has always fallen during past recessions. Not a bad 50-plus year track record.

Another good indicator is “nonfarm payroll employment.” Data from the Bureau of Labor Statistics show employment grew by 82,000 in December but fell by 18,000 jobs in January. Given total employment of over 138 million, these are not very significant changes.

I should note that all these statistics are seasonally adjusted so the time of year or particular months do not matter. The data from any month is comparable to the data from any other month.

In testimony before Congress yesterday, Fed Chairman Bernanke said, "At present, my baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of monetary and fiscal stimulus begin to be felt." This is a guy who should know. He has the best data and the best analysts at his disposal.

A recession occurs when there is negative growth, a decline, not little to no positive growth.

The bottom line: It does not appear a recession started in January. There is still a significant risk, a 50-50 chance, of a recession this year.

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