When Will the Recession End?
Brian Kelly
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Now that the election is over, President-elect Obama has a tough economic road ahead. The advanced GDP report of -0.3% suggests that the
A widely used index of economic activity is the Chicago Fed National Activity Index [CFNAI]. The index is released monthly and is a weighted average of 85 indicators of economic activity. Since the index is calculated using monthly data it can be used as a leading indicator for quarterly GDP. The following chart shows the CFNAI since 1967 with recessions in red.
The Chicago Fed produces two indexes, a monthly index and a three-month moving average of the monthly index. The three-month moving average index smoothes any volatility in monthly numbers and is used for economic forecasting.
A zero value for the three-month CFNAI indicates that the economy is expanding at rate of growth that is consistent with its historical trend. An index reading below -0.70 following a period of expansion indicates that a recession may have started. A reading above 0.70 two years into an economic expansion indicates increased probability that a sustained inflationary period has begun.
The three-month CFNAI crossed below -0.70 in December of 2007 and is therefore the likely start date of the current recession. According to the NBER, since 1967 there have been 6 recessions. The longest recessions lasted 16 months and occurred from November 1973 to March 1975 and July 1981 to November 1982. The shortest recession started in January 1980 and ended in July 1980, for a total of 6 months. The average recession lasted for 10.8 months.
Using the NBER figures and a start date of December 2007, the following recession window can be interpolated:
From this table it is clear that the
The start date of the recession is consistent with Federal Reserve models of the probability of recession. In a 2006 report, Jonathan Wright, a Fed researcher, developed a model for predicting the probability of a recession using the Treasury yield curve. The model developed used the 10 year - three-month spread and the effective fed funds rate. The following chart is from Wright's paper and shows the probability of a recession since 1964 using his Model B. (Recessions in red)
Model B was found to be a good predictor of recessions within 12 months of a high probability reading. Interestingly, it appears that the critical probability level for predicting a recession is 50%. Once the indicator reaches this level, there is high certainty that a recession will occur in the next 12 months.
Using Model B and current data yields, the following results from 1997-2008.
This graph illustrates that the probability of a recession in the next 12 months reached the critical level of 50% in the first quarter of 2007. Within 12 months, the three-month CFNAI crossed below -0.70 indicating a recession has begun. This provides more support for December 2007 as the start date for the current recession.
The Federal Reserve Bank of Philadelphia also publishes the probabilities of a recession in its Survey of Professional Forecasters [SPF] report. This data goes back to 1968 and shows the probability of a recession occurring in the next quarter. (Recession in red)
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With this series, it appears that 40% probability is the critical level in predicting a decline in GDP in the next quarter. Interestingly, the probabilities breached the 40% level in the first quarter of 2008. While not an exact match with Wright's Model B or the CFNAI data it is fairly close and can serve as additional evidence that the current recession began near the end of 2007 and the beginning of 2008.
After falling below 40% for one quarter, the Anxious Index breached the 40% probability mark again in the third quarter of 2008. This suggests that forecasters are expecting a decline in GDP for at least one more quarter. This projection means that the recession will last until March 2009, which is consistent with the long recession projection of April 2009.
The next CFNAI report will be released on November 24, and could provide clues regarding the duration of the economic malaise. Watching the 10 year - three-month spread and effective rates will also be of utmost importance.
Disclosure: I have no direct positions in any securities mentioned.
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This article has 29 comments:
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perceptions_now
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17 Comments
Nov 06 04:38 PMLet me say from the start, that the world and its financial system are now more interlocked than any other time in history and that the butterfly effect is very real. We have also stepped into the unknown, into a new paradigm and there is no going back!
What is the Motor of the World?
There will be many opinions, some will say China is now the motor of the world, some will say modern computers, some the US, some Oil, some this and some that. The truth is there are probably over 6 Billion opinions and most opinions would be at least partially true, given a particular time frame.
It would be correct to say that China has been a very significant force in global economics, certainly in the last 10-15 years. Certainly, the impact of computers and related electronics, over the last 50 years, has truly moved the world.
And, over 150 years, the US and Oil have been inseparable, as the driving forces of the global economy. Such a large part of the global economy today can be traced back to the US and it’s partnership with Oil.
But, in back of everything, the steady and un-relenting growth in population has always been the engine of economic growth, at national and global levels.
However, that motor is stopping!
How did we get here?
Population Growth & Aging -
It took all of history, up to the year 1800 AD, for humanity to reach our first Billion people. Baby Boomers had their origins in the population explosion that started as the Great Depression was ending; they were a large part of our 3rd and 4th Billion.
The population explosion really took off in 1945, it Peaked in 1956, then levelled out to 1964, before slowing significantly since then. Now, at over 6 Billion people, we are starting to exhaust the earth’s capacity to support human species.
A continuation of past growth would have seen the global population increase to 10 Billion by 2050 and 20 Billion by 2150. Clearly, that is not likely to happen, as population growth is slowing and the global population may start to fall, in the not too distant future.
Why, because we are now bumping into immovable objects, such as Peak Oil, Climate Change and Peak Food Production, all driven by the Global population.
With a few relatively minor interruptions, the period 1945 to 2005 was the greatest Global economic BOOM in history. In particular, the period 1995-2005 was a Growth Tsunami, driven by the Peak earning and spending capacity of US & other Global Baby Boomer consumers.
In addition, around the same time, technology drove massive gains in productivity, leverage multiplied and interest rates in the US remained artificially low, for far too long, following the events of 9/11.
This was a perfect storm, for making money.
Peak Oil -
To make life more interesting, Oil has also gone from $10 to nearly $150 a barrel, in just a few short years. Whilst there may have been some external influences, the main reason for this huge increase was Supply & Demand.
And, while there are arguments for Abiotic Oil, Coal & Gas, there are drawbacks for these "replacements&quo... and in some cases they may create more environmental problems.
Oil prices have since retraced to lower levels, in expectation of a substantial fall in oil usage, arising from a slowing economy.
Transport, Plastics, Medicines, Chemicals, the list is almost endless, that are dependent on oil, no wonder the US has had such a long lasting love affair.
When historians look back, they really will say, "did they just burn all that oil".
Climate Change -
Climate is our greatest asset, but changes are also starting to impact us now, as can be seen in the lack of water in some parts of the planet, increased storm severity in others and the melting of Glaciers and Polar Caps.
We have already passed major climate tipping points, the planets climate is set to get very difficult for humanity, including a possible new ice age. Sure, we can take the chance that the scientists have it wrong, but then if their right, this could be an Extinction Event.
Do we have the right to play Roulette, with the survival of future generations.
Peak Food Production –
With the total global population busting at the seams, we must make sure everything possible is done to ensure food production is provided for the increasing population, right?
Wrong, instead, we are diverting large parts of agricultural production away from food production and into the production of diesel, as a replacement for Oil.
Even if we wanted to boost Food production, Climate Change is and will continue to, raise serious questions on our present and future capacity, to deliver enough food, to keep the surging global population fed.
Where are we now and where to next?
Whilst the sub-prime debacle in the US has its own distinct origins, including NINJA mortgages (Greed), it has highlighted falling Real Estate values and New Housing starts, which has separate Demographic origins.
In economic terms, the primary driver of the real global economy is consumer demand. The largest demand driver is the 45-55 age group, primarily in the USA, due their big earning and spending capacity.
Demographic levels are already being re-shaped, as nearly two Billion Baby Boomers have commenced a 20 year transition from being big spenders, to big Retirement savers, to thrifty Retirees, before leaving us forever, in increasing numbers.
This massive aging of the global population is changing the dynamics of the world economy, with the bulk of Boomer wealth likely to pass on before they do and as the generations following behind the Baby Boomers, are relatively less in numbers.
In particular, Real Estate and New Housing markets, particularly in the US & Europe have already fallen and continue to do so, arising from a lowering in demand, led by thrifty and retiring Boomers.
As if housing issues were not enough, the aging process will also introduce some $50 Trillion in unfunded Health and Social Security costs.
So, we now see:
1) Supply (Oil) & Demand constraints.
2) A massive de-leveraging of financial markets, including some $500 Trillion in Derivatives.
3) Government Budget deficits continue to expand, due to the current Credit/Housing Crisis.
4) Massive increases Health and Social Security Costs, again expanding deficits.
5) Problems arising from Climate Change and Food production.
You can guess what awaits with Taxes, in the near future, to pay for past indulgences.
And, with Debt levels already at historical highs and past fixes, either not able to be used or possibly set to cause more harm, than help.
Now, we are just past the Peak of a once in history Population Growth Mega Cycle.
Now, expectations build of a slowing economic future, as reflected in stock markets and oil prices, next is reality.
Now, the perfect storm is reappearing, this time it is a Cat 5 in financial demolition!
What Futures await?
The very basis of modern life will be shaken, the magnitude of the quake, will be 9.9.
Whether we arrived at this situation, by accident or design, we are never likely to know, although events suggest a mixture of both, seems probable. So, the design has now been set in motion and we are now into the first quarter, of the highest stakes game, ever played!
Unlike the Great Depression, we are now truly between a rock and a really hard place.
The truth is, there is no magical, Hollywood, easy fix.
The truth is, there is no pot of gold at the end of the Kansas rainbow.
The truth is, things are going to be tough, for quite some time.
Had corrective decisions been made earlier, then it may have been possible to reduce some of the worst side effects, regrettably, that did not happen.
Regrettably, if we opt for a better now, then future generations will pay for our mistakes and indulgence. That reasoning is not acceptable and can not succeed!
As we look to the future, we need to look thru different eyes, thru different thought processes.
The days of Smoke & Mirrors, of Shock & Awe, of the Desire to Acquire & Retain Power, of Self interest, at the expense of societal interest, must end.
Can we make those changes, the answer is YES!
Will the required changes be made? Now there, is a $64 Trillion question!
The answers will come on these boards and others, in other forums, in politics, in business and the answers will need to come quickly.
There are discussions that must take place and Mindsets that must change; the time has come to look beyond borders and elections.
Good luck & watch the Debt
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bricki
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71 Comments
Nov 06 04:50 PM-
bosun.j
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235 Comments
My Website
Nov 06 05:08 PMThe Recession will end the day the Depression begins. That will be the day that Banksters bravo sierra catches up with them!
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Socialism cannot compete!
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484 Comments
Nov 06 05:22 PM"Now, at over 6 Billion people, we are starting to exhaust the earth’s capacity to support human species."
Absolutely false. The reason so many are malnourished in the world has MUCH more to do with the political regime they "live" under, not the lack of capability to produce enough food. Most people are not aware that the main reason for the population boom in the last century is simply that lifespans saw a big increase due to unprecedented advances in medicine -- vaccines, antibiotics, organ transplants, etc. Things unheard of before the 20th century. We are not likely to continue increasing life expectancies by the margin that we did so in the last century. The UN predicts increases to continue through about 2040 (with the pace of increase slowing), and then begin a population decline. Not because of food shortages or the inability of the Earth to support more people...but because citizens of industrialized countries are having fewer children. They are in school longer and marry later, delaying the start of family life.
If anything, we will find ourselves in a situation where we do not have ENOUGH people in younger generations. This is *already* the case in many European countries, which are giving tax credits...and even one-time lump sum payments to couples when they have a child!! We are currently in a situation in the U.S. where Social Security and Medicare are increasingly underfunded due to the swell of retirees (with the boomers just starting!) vs. the smaller base of workers paying in!!
Paul Ehrlich and his radical anti-birth associates have long since been discredited. Move along.
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Alex Filonov
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332 Comments
My Website
Nov 06 05:26 PM-
bosun.j
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235 Comments
My Website
Nov 06 05:59 PMNo crystal ball here either, just a recognition that we ain't seen nuthin' yet. ( As the pig with lipstick would say)
The housing bubble gets bigger every day. Banksters refuse to lend any of the $700m they got from we the people because they don't even trust each other!
Financial crisis coming down the line is 13x GDP in derivatives coming due.
No siree, no crystal ball needed. What is required is to stay away from that koolaid the pump and dump types are sellin'!
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Schweizer
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64 Comments
Nov 06 06:16 PM1. Economic and stock market recoveries roughly coincide.
2. Recovery in the auto sector precedes recovery in the equity market.
3. Bear market bottoms are characterised by an increasing supply of good economic news being ignored by the market.
4. While numerous bulls bang the drum for equities even at the bottom of the market, they will be ignored.
5. Many commentators will suggest the worsening fiscal position will prevent economic recovery or a bull market in equities. They will be wrong.
6. Decline in reported corporate earnings will continue well past the bottom of the market.
7. The bottom is preceded by a period in which the market declines on low volumes and rises on high volumes.
8. The end of a bear market is characterised by a final slump of prices on low trading volumes.
9. Confirmation that the bear trend is over will be rising volumes at the new higher levels after the first rebound in equity prices.
10. There will be a large number of individual investors shorting stocks at the bottom of the market. Short positions will reach high levels at the bottom of the equity market and will increase in the first few weeks of the new bull market.
Bottom line, we are in the very early innings and the recession will likely become a depression, of which this guy has no data!
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User 171371
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13 Comments
Nov 06 06:56 PMDoes anyone in their right mind think its business as usual after the next four years.
Pray that Obama moves to the middle.
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fatcat
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485 Comments
Nov 06 07:12 PM-
poor&unemployed
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36 Comments
Nov 06 07:22 PMBut good news people. Your beloved new leader has planned a speach on January 20th, which will blow away the recession. He will bring peace to the whole world and we will be rich again.
That does not make any sense! To be rich we need poor people. So I guess world will not be a happy place. OR the World will be happy and we may not!
We have four more years of "HELL" ahead of us. (that is if you own a computer. If you dont - happy days are here again!!!)
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perceptions_now
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17 Comments
Nov 06 07:35 PMFood production has been more a matter of lack of political will, until now.
We may have to disagree on what will happen, as I see a number of factors coming together (including total population, Climate & Peak Oil) that will present great difficulties, going forward.
I also agree that there was a great increase in lifespan, due to advances in medical science.
It is also possible that the total population may continue to increase, for sometime yet, although the rate of increase has already slowed considerably.
And, from a certain perspective, there is a shortage of younger people.
In fact, that is where the immediate problems stem from.
The rate of population increase has slowed from the rates in the Boomer generation, which is affecting Demand & Supply, which in turn is affecting the mainstream economy & the financial markets.
In other words, the rate of Growth is slowing and is in the process of permanently reversing.
This is different to any previous Recession &/or Depression.
I would recommend a broader perspective, there are many interrelated issues in play.
PS - Sorry, I don't know Paul Ehrlich's work, so I can not comment.
On Nov 06 05:22 PM Socialism cannot compete! wrote:
> @perceptions_now: Out of a very lengthy, rambling comment containing
> much speculation not backed by facts, I need to pick on one lie in
> particular:
>
> "Now, at over 6 Billion people, we are starting to exhaust the earth’s
> capacity to support human species."
>
> Absolutely false. The reason so many are malnourished in the world
> has MUCH more to do with the political regime they "live" under,
> not the lack of capability to produce enough food. Most people are
> not aware that the main reason for the population boom in the last
> century is simply that lifespans saw a big increase due to unprecedented
> advances in medicine -- vaccines, antibiotics, organ transplants,
> etc. Things unheard of before the 20th century. We are not likely
> to continue increasing life expectancies by the margin that we did
> so in the last century. The UN predicts increases to continue through
> about 2040 (with the pace of increase slowing), and then begin a
> population decline. Not because of food shortages or the inability
> of the Earth to support more people...but because citizens of industrialized
> countries are having fewer children. They are in school longer and
> marry later, delaying the start of family life.
>
> If anything, we will find ourselves in a situation where we do not
> have ENOUGH people in younger generations. This is *already* the
> case in many European countries, which are giving tax credits...and
> even one-time lump sum payments to couples when they have a child!!
> We are currently in a situation in the U.S. where Social Security
> and Medicare are increasingly underfunded due to the swell of retirees
> (with the boomers just starting!) vs. the smaller base of workers
> paying in!!
>
> Paul Ehrlich and his radical anti-birth associates have long since
> been discredited. Move along.
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The Sentinel
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13 Comments
Nov 06 07:47 PMWhile technically true that the globe can support much more tha 6 billion people, it is practically NOT true. Your comment that most impoverishment and hunger globally is due to repressive regimes is also technically true but your dismissing of the assumption that the planet cannot support that number shows you have a quasi-utopian view that if we could just get rid of repressive regimes things would be much better and the world could support more people. True enough....just show me where in history there was a period of time when there wasn't a preponderance of repressive regimes.
Otherwise, you have to deal with the facts at hand, not what you wish.
On Nov 06 05:22 PM Socialism cannot compete! wrote:
> @perceptions_now: Out of a very lengthy, rambling comment containing
> much speculation not backed by facts, I need to pick on one lie in
> particular:
>
> "Now, at over 6 Billion people, we are starting to exhaust the earth’s
> capacity to support human species."
>
> Absolutely false. The reason so many are malnourished in the world
> has MUCH more to do with the political regime they "live" under,
> not the lack of capability to produce enough food. Most people are
> not aware that the main reason for the population boom in the last
> century is simply that lifespans saw a big increase due to unprecedented
> advances in medicine -- vaccines, antibiotics, organ transplants,
> etc. Things unheard of before the 20th century. We are not likely
> to continue increasing life expectancies by the margin that we did
> so in the last century. The UN predicts increases to continue through
> about 2040 (with the pace of increase slowing), and then begin a
> population decline. Not because of food shortages or the inability
> of the Earth to support more people...but because citizens of industrialized
> countries are having fewer children. They are in school longer and
> marry later, delaying the start of family life.
>
> If anything, we will find ourselves in a situation where we do not
> have ENOUGH people in younger generations. This is *already* the
> case in many European countries, which are giving tax credits...and
> even one-time lump sum payments to couples when they have a child!!
> We are currently in a situation in the U.S. where Social Security
> and Medicare are increasingly underfunded due to the swell of retirees
> (with the boomers just starting!) vs. the smaller base of workers
> paying in!!
>
> Paul Ehrlich and his radical anti-birth associates have long since
> been discredited. Move along.
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2009 is more of the same 2008
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51 Comments
Nov 06 08:45 PM-
The hand
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774 Comments
My Website
Nov 06 10:17 PMseekingalpha.com/artic...
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John Pseudonym
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232 Comments
Nov 06 10:49 PMWe have not simply slowed down on our way to picking up speed again in a few months. The dynamics of the entire system have changed and are still evolving.
Keep your money safe and wait for the dust to clear. Don't try to buy the bottom; instead wait until it's clear that it's past as there's plenty of money to be made between the bottom and top without timing both perfectly.
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sheople
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67 Comments
Nov 06 10:55 PMThe "Big Wheels" are now having trouble fleecing (through the federal reserve/Wall Street) the citizens because as a whole, we are broke. Too bad for the "Big Boys". Well, they can keep going for a little while on the bail-out money. As for when "it" ends, I don't believe I will live to see the end.
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E Nuff Sed
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146 Comments
Nov 06 10:57 PM-
presskh
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2 Comments
Nov 06 11:12 PMOn Nov 06 04:38 PM perceptions_now wrote:
> What is the Motor of the World and why is it stopping?
> Let me say from the start, that the world and its financial system
> are now more interlocked than any other time in history and that
> the butterfly effect is very real. We have also stepped into the
> unknown, into a new paradigm and there is no going back!
Very well thought out and perceptive assessment. I think much of the population thinks that, given a few more months, maybe even a year, things will be back to "normal" and we will be back on the road to ever-increasing prosperity. I don't really see it that way myself either, as our insurmountable debt, combined with all the other factors you mentioned, will be a tremendous ball and chain on future prosperity.
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presskh
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2 Comments
Nov 06 11:14 PM-
Jack K
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76 Comments
Nov 06 11:27 PM-
EasyLearn
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2 Comments
My Website
Nov 07 12:11 AM-
bearfund
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546 Comments
Nov 07 12:17 AM-
Socialism cannot compete!
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484 Comments
Nov 07 12:42 PMIt's actually time for Western nations to rethink their seeming distaste for conservative family values and rethink the possibility that having children and raising them with old-fashioned values, strong character, and a good work ethic is what built up the American nation and would serve us well again. Methinks it would bring much more satisfaction than placing so much value on our stock portfolio and having 2nd homes, but only 1, maybe 2 kids...or in some cases none (but always 2 dogs, of course....)
We've had it wrong and its time to rethink.
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lefty37
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29 Comments
Nov 08 08:44 AMThere is ONLY one way to get out of this mess.
Put the american public back to WORK.
Bring our work back home, buy american, conserve, and help our neibors.
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Allah
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31 Comments
Nov 09 09:39 AMOn Nov 06 06:56 PM User 171371 wrote:
> When the Democrats pass all their Socialistic policies and programs
> our country will look like a decadent European Society.
>
> Does anyone in their right mind think its business as usual after
> the next four years.
>
> Pray that Obama moves to the middle.
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Trotzen
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1 Comment
Nov 11 08:26 AM-
sankar
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1 Comment
Dec 08 12:36 PMpersonally i feel the marxian theory is right: capitalism will destroy itself...but dont worry . communism is already dead!! the synthesis will be on the lines of politico/economic system in countries like india sans indias own corruptions and inefficiencies.
i am not a hotshot mba or phd.I am adding this I want people to believe me!!!