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Forecaster sticks to message: U.S. recession is imminent

The stock market's recent upswing has been credited at least in part to the improved economic sentiment in the United States.

Seth Wenig/Associated Press/Seth Wenig/Associated Press

'The mood surrounding the U.S. economy may be improving, but the numbers still point toward another recession, says one of the most closely followed trackers of U.S. economic trends.

The Economic Cycle Research Institute – an independent research firm whose composite indexes of economic data have become must-reads for watchers of macroeconomic fundamentals – issued a statement this month reiterating and defending the call for a recession that it has had in place since last September, but which has become increasingly out of touch with the consensus.

"Our call still stands," ECRI's co-founder and chief operations officer, Lakshman Achuthan, told CNBC in a recent interview. "When you look at the definitive hard data that is used to officially date business-cycle recessions, it has been getting worse, not better, despite what the consensus view of an improving economy has been."

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Sentiment has certainly been mounting against ECRI and other bearish prognosticators.

The Dow Jones Economic Sentiment Indicator – which each month measures the overall tone of views on the U.S. economy expressed in articles contained in 15 major U.S. newspapers – has rebounded since hitting lows in October, jumping to its strongest reading since December, 2007, when the U.S. recession began. While the current reading of 47.4 is still below its historical average (about 55), as well as its theoretical neutral midpoint of 50, the recent uptrend has lifted it comfortably above the threat-of-recession levels that historically loom below 40.

Meanwhile, economists' consensus forecast for 2012 U.S. gross domestic product growth, which bottomed at a tepid 2 per cent last fall, has reversed course in the past few months, sitting at 2.2 per cent in Bloomberg's most recent survey. That improvement has been characterized primarily by a change of heart among Wall Street's most bearish economic faction – the lowest forecast in the survey has risen a full percentage point since November, even as the high end of the survey's range has eased slightly.

"Look, I wish this wasn't our forecast," Mr. Achuthan said. "We are the skunk at the garden party – it's no fun."

But ECRI insists that the data don't support the mood – and points to its U.S. Coincident Index (USCI) as proof. Year-over-year growth in the index – a composite of the same U.S. economic indicators that are used to officially determine when U.S. recessions begin and end – recently fell to a 21-month low.

"When USCI growth is in a downturn, it's an authoritative indication that overall U.S. economic growth is actually worsening, not reviving," Mr. Achuthan and colleague Anirvan Banerji wrote in the statement.

"You haven't had a decline like that in the past 50 years without a recession following in short order," Mr. Achuthan told CNBC.

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ECRI's forward-looking economic composite indicators don't paint any brighter a picture.

"We find that year-over-year growth in ECRI's Weekly Leading Index remains in a cyclical downturn and, as of early March, is near its worst reading since July, 2009," Mr. Achuthan and Mr. Banerji said.

ECRI's bearish view is not only backed by its data, but by its track record. The firm, founded in 1996, has correctly predicted each of the past three recessions – and has yet to be wrong in throwing down the dreaded "R-word."

By contrast, the stock market – whose recent upswing has been credited at least in part to the improved economic sentiment – has proven a much less reliable predictor, particularly with its tendency to deliver false signals of impending turning points.

"The stock market, just like it's forecast nine of the past five recessions, it's forecast nine of the past five recoveries," Mr. Achuthan said.

So when is this recession expected to arrive? ECRI predicted back in September that it would begin by the middle of 2012 – and it hasn't backed down from that prediction, either.

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"But here's the rub," Mr. Achuthan said. "When you're looking in the rear-view mirror, you see it takes about a half a year after a recession begins before people realize that a recession has begun."

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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