Sunday, January 13, 2008

Predicting Recessions

John Mauldin's Outside the Box newsletter released last Monday discussed many of the current issues facing the stock market. One paragraph in particular stood out to me, since I had read a portion of it elsewhere.

Last week's poor ISM and employment reports add further confirmation to this expectation, particularly given that total non-farm employment has grown by less than 1% over the past year, less than 0.5% over the past 6 months, and the unemployment rate has spiked 0.6% from its 12-month low (all of which have historically indicated oncoming recessions). The ECRI Weekly Leading Index is now clearly contracting as well. The expectation of oncoming recession may be gaining some amount of sponsorship, but it is still far from the consensus view, and is therefore most probably far from being fully discounted in stock prices.
I had read before that a reliable indicator of oncoming recession is when the unemployment rate rises 0.5% from its recent trough. I had not seen the other two predictors of recession, although they are probably true by virtue of being correlated with one another.

These measures are good indicators because they proxy future consumer spending. They would be less reliable when predicting recessions caused by decreases in investment. Your thoughts?

Minding the Hinges on Pandora's Box
By John P. Hussman, Ph.D.
John Mauldin's Outside the Box, 1/7/2008

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