STILL NO RECESSION ON THE HORIZON
By Cullen Roche
Recent data has shown some signs of weakness in the broader economy, but this doesn’t change my long held outlook on continued growth and no recession. The latest update to my expansion/contraction model is showing growth just shy of 3% in H1 20112 and averaging just 1.5% in H2. This comes out to a little over 2.25% for the year. Not bad, but clearly not great either. We’re still muddling through. The bad news comes in 2013.
The model is currently showing a recession to officially begin in Q2 2013. This largely due to the outlook for substantial decline in deficit spending as growth in credit and investment remain very weak into 2013. In the last 50 years the model has never experienced two negative quarters without a recession following. The current forecast shows two official contracting quarters in Q2 & Q3 of 2013. So we have some breathing room for now, but the risks are mounting as the years goes on.
The upside risk to this forecast is a potential boom in credit and investment while the downside risk is an acceleration in the size of the deficit. As of now I would wager that the odds of sharp contraction in the deficit heading into 2013 are lower than the CBO is currently forecasting. Additionally, recent real estate data and credit trends are showing some signs of stabilization. In my opinion, this means we could see upside risk overall to this model. Nonetheless, while the effects of the balance sheet recession are definitely waning, the depth of this recession and the dramatic negative impact will continue to impact the economy well into 2013.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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18 Comments
So you use CBO data? Thanks for sharing the model.
So, Recession on the horizon
Given the widespread acknowledgement that the ongoing economic contraction is the “worst since the Great Depression”, how come this isn’t reflected in the severity of the contraction as shown by this model?
Kinda makes me less willing to put much stock in this model.
Although I agree that we are not going to see the next recession just yet. (my gut indicator, nothing fancy)
A bit closer to the election, or immediately thereafter, and it’s a completely different story.
The depth of the decline was interrupted by record stimulus.
more money printing by the fed coming up.
Help me understand this part: “[...] while the downside risk is an acceleration in the size of the deficit.” That sounds like you are saying an increase in the growth rate of the deficit (i.e. a more rapidly increasing deficit) is a downside risk?
Yes, that sounds stupid. Sorry. What I mean is an acceleration in the size of shrinkage. That sounds confusing, doesn’t it? I mean shrinking deficit. Sorry for that.
The US economy is already in a recession. IMO, too many indicators (and CR/TPC has listed some of them) point in that direction. And the chinese economy is contracting as well, because electricity production is down for some 5 to 6 months. When I look at US electricity production it clearly suggests the US economy is contracting as well.
Great point on US electricity production. What data sets are you using? Real time?
A. Gary Shilling talked about it as well. Look at the website of the EIA.
http://www.eia.gov
A lot can change in the next few quarters given the election, Europe’s crisis and China. Unexpected fiscal policy decisions are a major wildcard here given the high dependency with such a weak economy.
Remember, economic growth is not synonymous with returns on equities. Equities are still not cheap enough compared to the normal evolution of a deleveraging cycle.
sell in may and go away, always works
And the story about “how to make money out of thin air” continues. There is clear sign of the US governments inabilitity to solve this problem. So lets call to FED and print some more money to flood it to the market. I would´t call it a stimulus
You should also mention that for part it is a guilt of US that Canada is entering a deep economic crisis too. With the slow growth and high levels of household debt, Canada is highly dependent on its natural resources sector.
Any drop in the prices of those resources can lead to a recession. Other question is a housing market (you can check Canada Real Estate Trends), which is constantly endangering the economic prospects for the future.
Question, why do you not figure inflation into your equation?
When inflation is factored in, especially if you adjust it to eliminate the housing offset, we have negative growth.
I do….The model is real growth.
Does your model adjust the Kalecki equation (Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends) by segregating foreign earnings from domestic (using the relevent local data for each), and then readjust for the FX changes in repatriating foreign denominated currencies to USDs? You seem to hit the nail on the head each time with this model, but because my gut is telling me things are worse off than you believe I’m wondering if this could be a source of leakage in your model (ie, if you’re using US data for the large chunk of earnings from the EZ, I think the profits etc will be artificially inflated right now).
Hi Cullen,
Whenever you post a Prag Cap chart, I have a difficult time quickly discerning the Date vs. Data. Been meaning to ask for a while if you can post faint vertical lines across the charts at the x-axis for each date? Love the info and I’ll keep spreading the good word about your site…