Beware The Wild West Of Recession Analytics

The casual consumer of economic news may be tempted to lump the recent surge in recession warnings as one of a kind. But the quality and reliability in this corner of macro analytics varies widely and so it’s essential to recognize the basics for how and why business cycle profiles diverge.

Recession analytics come in three primary flavors: 1) backward-looking summaries; 2) estimates of the current state of the economy; and 3) projections of the future. For (hopefully) obvious reasons, as you move from 1 to 3, your skepticism should rise.

Too often, however, all three are treated as equivalent. But common sense tells us that a warning that the economy is in danger of falling into contraction a year from now is far less dependable vs. a current assessment of conditions or reviewing recent history. The logic here is that the availability of published data, or the lack thereof, determines how to think about a given recession estimate.

Consider, for instance, a new Bank of America Merrill Lynch survey of US credit investors, which was breathlessly presented this week as a warning that a “recession fears have hit an all-time high, its highest reading” according to a headline. That sounds worrisome, but the details reveal that “the perceived probability of a recession in the next year spiked to 25%” and the history of the data set are a mere three years old.

By contrast, yesterday’s update of the Philadelphia Fed’s ADS Index revealed that a backward-looking measure of the economic activity, using hard data, strengthened to a moderate pace of slightly better-than-average conditions (above 0) relative to the benchmark’s multi-decade (albeit partly back-filled) history. Note that the latest reading (+0.139 for Sep. 7) is well above the -0.80 mark (red line in chart below) that a San Francisco Fed paper recommends as a tipping point for signaling the start of a recession for analyzing ADS data.

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Texan Hunter 3 weeks ago Member's comment

Yee-Haw! Wild west is right.