Case for a Global Recession
I think the entire global economy is in recession and said so on July 6, 2012 in Plunging New Orders Suggest Global Recession Has Arrived
However, we need to define the term "recession"
Contrary to popular myth, recession does not mean two consecutive quarters of economic contraction. Rather, two consecutive quarters of economic contraction is a sufficient, but not necessary condition.
In the US, the NBER is the official designator of recession start and end points. Many recessions have started with GDP still growing.
The "Conditions for Global Recession" are even looser. "The International Monetary Fund (IMF) considers a global recession as a period where gross domestic product (GDP) growth is at 3% or less. In addition to that, the IMF looks at declines in real per-capita world GDP along with several global macroeconomic factors before confirming a global recession."
Given current conditions are what one would expect from outright stagnation (if not worse), I am confident a global recession has begun.
What About a US Recession?
On June 21, I gave 12 Reasons US Recession Has Arrived (Or Will Shortly).
Tipping the Balance to Now (Not Shortly)
- The Third Consecutive Weak Payroll Report
- The pending Global Collapse In Auto Sales
- Plunge in China Import Growth (For discussion see China Import Growth Plunges, Trade Surplus Hits 3-Year High; Will US Response Be Protectionism? Is China Headed For a Deflationary Shock?)
That is enough for me. And I am not the only one to feel that way.
ECRI's Achuthan: "I Think We're in a Recession Already"
Link if video does not play: ECRI's Achuthan Says U.S. Economy Is in Recession
Partial Transcript of Video
Achuthan on whether he can reaffirm his recession call from last year:Those are exactly the kinds of things that irritate me about the ECRI. The fact of the matter is Achuthan was calling for a recession in September, not December, and not June.
“Yeah…I think a lot of people forget what our call was. What we said back in December was that the most likely start date for the recession would be in Q1 and if not then, by the middle of 2012. I'm here to reaffirm that. I think we're in a recession. I think we’re in a recession already. As I said back there, it is very rare that you know you're going into recession when you’re going into recession. It often takes some big hit on top of the head. In the last recession, it took Lehman to wake people up and the recession before, it took 9/11.”
For details, please see my September 30, 2011 post ECRI Calls Recession Based on "Contagion in Forward Indicators"; Just How Timely is the Call?
Tom Keen: "Single Sentence, why recession now"
ECRI's Lakshman Achuthan: "Contagion in Forward-Looking Indicators"
That link clearly shows I thought a recession was imminent as well. Those are the facts. It is silly to try and hide them.
Yet, in December (after economic data firmed), Achuthan moved the date forward to June, wanting another 6 months to be proven correct.
My question in September "Just How Timely is the Call?" was a good one. The ECRI has been both very early and very late. Far from the perfect track record they claim.
That my friends is the nature of making predictions. No one is perfect, not me, not Achuthan, not anyone, and it is very foolish to pretend otherwise.
Actually, I have no problem at all with Achuthan moving the date forward. Conditions change. My problem, is revisionist history that makes it appear as if a recession call in September was a recession call for June (made in December).
All this nonsense goes away the moment Achuthan admits the ECRI does not have a perfect track record.
That said, I think Achuthan is now correct. However, I thought so in September. So be it. I was wrong. The solution when you were wrong is easy, simply say you were wrong.
The Other Extreme "Recession is Not Imminent"
Please consider the other extreme, Recession is Not Imminent by Dwaine van Vuuren.
Among the bearish voices I most respect is John Hussman, whose work I read regularly. He is thorough and quantitatively rigorous. Whenever I am convinced there will be no recession, I temper my enthusiasm by re-reading his articles to make sure I maintain a balanced view. One day he will be right and I will be wrong, but at least I won't be blindsided.Emphasis in italics added.
But the data don't show catastrophe. Looking at the Leading SuperIndex, we are a bit worse off than last summer and the summer before that. We just put in a leading SuperIndex peak on April 13 (10 days after the SP-500 peak) that is lower than the prior two peaks. This slowdown, if not checked in time, may well be the one that pushes us into recession. But even that worst-case scenario is still three to four months away, according to the SuperIndex recession-path projections in our regular weekly report.
I disagree. The global data is an outright catastrophe. Moreover, the jobs reports in the US and the US ISM manufacturing numbers are a catastrophe as well.
I am amused by van Vuuren's statement "at least I won't be blindsided". I suggest he already is.
"We Have Reached the Point that Delineates an Expansion from a New Recession"
John Hussman asks What if the Fed Throws a QE3 and Nobody Comes?
With regard to the economy, I noted two weeks ago that the leading evidence pointed to a further weakening in employment, with an abrupt dropoff in industrial production and new orders.Permabears?
Mike Shedlock reviews the litany of awful figures we’ve seen since then, focusing on the new orders component of global purchasing managers indices: U.S. manufacturing new orders and export orders plunging from expansion to contraction, Eurozone new export orders plunging (only orders from Greece fell at a faster rate than those of Germany), and an accelerating decline in new orders in both China and Japan.
Recall that the NBER often looks for “a well-defined peak or trough in real sales or industrial production” to help determine the specific peak or trough date of an expansion or recession. From that standpoint, the sharp and abrupt decline we’re seeing in new orders is a short-leading precursor of output. As the chart below of global output suggests, I continue to believe that we have reached the point that delineates an expansion from a new recession.
On the employment front, Friday’s disappointing report of 80,000 jobs created in June may be looked on longingly within a few months, as we continue to expect the employment figures to turn negative shortly. That said, it remains important to focus on the joint action of numerous data points, rather than choosing a single figure as an acid test. I noted last week in Enter, the Blindside Recession, GDP and employment figures are subject to substantial revision.
Lakshman Achuthan at ECRI has observed the first real-time negative GDP print is often seen two quarters after a recession starts. Earlier data is often subsequently revised negative. As for the June employment figures, the internals provided by the household survey were more dismal than the headline number. The net source of job growth was the 16-19 year-old cohort (even after seasonal adjustment that corrects for normal summer hiring). Employment among workers over 20 years of age actually fell, with a 136,000 plunge in the 25-54 year-old cohort offset by gains in the number of workers over the age of 55. Among those counted as employed, 277,000 workers shifted to the classification “Part-time for economic reasons: slack work or business conditions.”
Hussman has been labeled a "permabear". So have I. So has Dave Rosenberg. So have many others. It only seems that way. The reality is Hussman, I, and Rosenberg were bullish at the March 2009 bottom.
However, the market shot up so far, so fast, that valuations became quickly stretched.
I cannot speak for the others, but I surely underestimated the effect of global coordinated liquidity move by central bankers virtually everywhere (US, EU, UK, China, Australia, Canada, etc.).
The result was we had a 10-year stock market rally in three years. Those patting themselves on the back for their "no recession" call were correct only because of a massive coordinated liquidity pump by central bankers worldwide.
Unless the "no recession" callers specifically counted on that, then they were lucky with their forecast.
What about now?
What if the Fed Throws a QE3 and Nobody Comes?
What if stock market valuations reach typical bear market valuations?
What if a recession is really at hand?
I do not believe the Fed is in control. Such ideas are a myth.
If the Fed could prevent recession we would never have them. Yet we do, don't we?
The fact of the matter is Fed tail-chasing policies combined with fractional reserve lending and moral-hazard bailouts have amplified the crest and trough of every boom and bust.
Deep Problems
Hussman comments ...
Our economic problems run far deeper than what can be healed by more reckless bubble-blowing by the Federal Reserve. At the center of global economic turmoil is a mountain of bad debt that was extended on easy terms by weakly regulated lenders with a government safety net. Global leaders have done all they can to protect the lenders at the expense of the public – to make good on the bond contracts of mismanaged financial institutions by breaking the social contracts with their own citizens. The limit of this unprincipled madness is being reached.Recognizing the Limits of Madness
The way out is to restructure bad debt instead of rescuing it. Particularly in Europe, this will require numerous financial institutions to go into receivership, where stock will be wiped out, unsecured bonds will experience losses, senior bondholders will get a haircut on the value of their obligations, and loan balances will be written down. Bank depositors, meanwhile, will not lose a dime, except in countries where the sovereign is also at risk of default. Even there, depositors will probably not lose any more than they would if they held sovereign debt directly. In the U.S., the pressing need continues to be mortgage restructuring, and an emerging recession is likely to bring that issue back to the forefront, as roughly one-third of U.S. mortgages exceed the value of the home itself
I agree. The key statement is "The limit of this unprincipled madness is being reached."
The problem is not only recognizing the limits of "unprincipled madness" but also recognizing the market's willingness to play along. It always lasts longer than one thinks possible.
At the end of the line, every possible person is sucked into belief current conditions can go on forever. We saw that in the 2000 dot-com bubble, the housing bubble, the commercial real estate bubble that followed the housing bubble, and we see it now in the "Fed is omnipotent belief bubble".
The only reason we have escaped recession so far is the amazing effort central bankers and global governments have put forth to avoid what needs to be done. Congratulations to those who recognized this condition in advance.
However, no credit can be given to those with the misguided belief such policies and efforts will last perpetually. The end of the line always comes.
No Decoupling
There was no decoupling in 2008 and there will be no reverse decoupling now. For further discussion please see Will the US Economy Continue to Decouple From the Rest of the World?
Recession Has Begun
In this case, the data speaks for itself. We are at the end of the line. The recession is not coming, it is not down the road, it is not likely, it is not at even at-hand.
Rather, the recession has begun. Fiscal stimulus from Congress is not coming and no amount of QE is going to stop it.
Addendum:
Please see followup discussion from John Hussman
Email Comments From Hussman Regarding Start of Recession and ECRI Track Record
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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