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The sluggish GLEI growth from this most recent trough is evident when compared to the prior 15 contractions on the chart below, where we see we are way below the average GLEI recovery 18 months after the trough. But the real outlier event is that it took the GLEI 14 months to break above zero, versus the average 6 months. The only other time that took longer to break above zero from the trough was in 1984 when the GLEI took a whopping 24 months to get from trough to zero.

Given the below par reading of the GLEI growth after 18 months and the fact that it took 14 months to break above zero makes for an atypical global recovery.

We observe another thing from the above chart – below par recoveries remain below par recoveries. The only time a below-par recovery managed to morph into an above-average recovery was in 1992. The 1982 recovery was a “on-par” recovery that morphed into a “above par” recovery. Whether the recovery is above or below par has very slight statistical bearing on how long the GLEI subsequently remains above zero. The average time the GLEI remains above zero is 18 months (ranging from 9-26 months) for above-par recoveries and 13 months (ranging from 3-22 months) for below par recoveries.

The following charts and text are an extraction from our monthly Global Recession Report, one of 3 weekly and 5 monthly  reports we issue 17 times each month for an all-inclusive $395 per annum.

We have all the numbers in for quarter-on-quarter GDP growth for Q4-2012 from around the world. Since our last report in February “World plunges into recession”, the percentage of countries with negative q-on-q GDP growth (1 and 2 consecutive quarters) have improved somewhat as more countries came into the sample and GDP’s revised upwards. But we are still at worrying global recessionary levels (the blue and black dotted lines.) There is no doubt we are in the depths of a second global recession since the 2008 Great Recession, but amazingly the U.S seems to have skirted it  (so far.)

An inspection of individual countries & trading bloc’s gives one pause for some thought. Europe (25% of world GDP) and the G7 bloc (54% of GDP) are in “mild recessions” (only 1 quarter negative growth) whilst all of the “traditional recession” (at least 2 quarters negative growth) countries are isolated to Europe and make up only 9% of world GDP. Whilst the countries that are in “Expansion” make up 74.8% of world GDP, the GDP-weighted bloc shows we have tipped into “mild recession” in Q4-2012. The “non-trivial” economies that are of concern at the moment are France (4% of world GDP) , Germany (5.4%), Italy (3.2%), Spain (2.2%), UK (3.9%) and the U.S (25%) that appears on the brink.

The wild card is the U.S – at 25% of world GDP. If she plunges into recession its curtains for everyone else. The initial GDP print of -0.1% gave everyone a fright (although we have always maintained this was a manifestation of the many short leading indicators that curled over 6 months back and the long-leading indicators that signalled near-recession 14-18 months back.) but this was revised up to 0.1 and then 0.4%. Taking the 0.4% final estimate reading for U.S 4Q2012 GDP and the 1st estimate for GDI, our GDP/GDI Recession Model signals 24% probability of recession:

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However, our Short Leading and Long leading indexes are signalling expansion ahead and should the U.S tip into technical recession, we maintain it should be mild and of short duration. Below is our own Short Weekly Leading Indicator we maintain for clients as an alternative view to that of ECRI’s (call it WLI-2). It consists of two parts, WLI-2nr which has non-revisable, non-seasonally adjusted weekly  components:

1. a Stock Market composite (index of most economically sensitive stocks)
2. a  Corporate Bond composite
3. a  T-Bill/Commercial paper spread composite

and WLI-2r which is WLI-2nr plus the following mildly revisable  weekly updated components:

1. Unemployment composite
2. A Credit Spread composite (over 50 diversified credit spreads)

Clearly there were two near misses by WLI-2r in Oct 2011 and June 2012 with WLI-2nr (the non-revisable one) signalling mild, brief recession ahead. The important thing is not the near-misses but the slope and direction of WLI-2 since then – which is clearly up. The expectation, as business cycle theory goes, is that the GDP dip we saw is temporary. This is certainly borne out by our monthly co-incident indicator, the NBER Model, an updated image of which you can obtain from the front page of our web site, which appears to have bounced smartly since it troughed in October 2012, some 5 months after WLI-2 troughed.

Speaking of leading indicators, let us examine those of the rest of the globe to see if things are also looking up. They were just updated today (10 April) and are “fresh from the grill”. We see from below that the Global GDP-weighted LEI has stuck its head above water for the last 4 months after being under zero for the last 18 months. More importantly however, the percentage of 41 countries around the globe that have their LEI’s popping above zero is on a steep incline (as we expect and desire to indicate broad participation) and just rocketed to 70%. This basically tells us the slowdown should be over and the leading effects of each countries’ LEI’s should start taking effect on the co-incident data (such as GDP) around about now.

The individual country Leading Economic Indicator (LEI) details are below:

NOTE : The above charts and text are an extraction from our monthly Global Recession Report, one of 3 weekly and 5 monthly  reports we issue 17 times each month for an all-inclusive $395 per annum.

However there are two sides to this coin and when we inspect the Leading Economic Indicators (LEI’s) of the 41 countries in question we see that the Global LEI dipped below zero into recession territory in July 2011, bottomed in Dec 2011 and rose above zero in Sept 2012:

Also, the percentage of countries with positive LEI’s (black line in chart depicting expansion) seemingly bottomed in March 2012. However it is evident that unlike the prior recession, the black line has not zoomed up in tandem with the blue line implying that the global LEI rise only has a few large contributors such as U.S, Canada, Germany, Italy, Australia and U.K to thank for its recent rise. The LEI rebound therefore lacks broad-based participation at this point which is a cause for concern.

A long-term version of the chart above that we maintain for clients implies the blue line crossing zero on left axis should be confirmed with the black line crossing 0.5 on the right axis to enable robust inferences on global recession or expansion. Thus, when at least 50% of countries have LEI’s above zero, we can breathe easier but for now this is still white-knuckled riding the rapids “edge of the seat” stuff.

Looking at the level of the blue line and that of the black line, a world “double-dip” scenario does not seem out of the question if LEI data does not improve in the ensuing months. The lacklustre performance of the Chinese and Indian LEI’s is especially worrying.

The table below plots the last 20 quarters (5 years) of quarter-on-quarter GDP growth. With most of those countries still outstanding fresh data (tagged “…”) hovering on the brink, there are going to have to be some hefty upward revisions and re-estimations to improve matters from here. It is interesting to note that the equally-weighted average GDP growth has now fallen into negative territory for one quarter, although the GDP-weighted one has not.

We continue to monitor the US NBER Recession Model and the GDP/GDI Recession Model closely for clues on a current U.S recession. As we forecast a month ago, Personal Incomes plunged as a result of all the stuff pulled forward before the Fiscal Cliff Tax debate which made things worse for the NBER Model, but the GDP/GDI model improved with the -0.1 to 0.1 GDP 2nd-estimation and an upward revision to 3Q12 GDI. But its all very much uncomfortably “on the brink” at the moment. Looking at the strong showing of the 9 components of our US Long-Leading Index (which never signalled recession but did come on the brink 18 months ago), we can only conclude we will either enter a mild recession or experience a “soft landing” before resuming expansion. For now, the stock market seems to be coming to the same conclusion and happily continue on its liquidity-fuelled rally.

NOTE : Read the follow-on to this article.

Now this is a diffusion index, with each country receiving equal weightings, and so it appears that 60% seems to be a viable threshold for the definition of “global recession” using the single-quarter definition (black) and 70% is probably the appropriate threshold for the 2-quarter definition (blue).

Countries in “recession” for the 18 countries we have data for so far in 4Q  are:
Austria, Belgium*, Czech Republic*, France, Germany, Hungary*, Italy*, Japan*, Netherlands*, Portugal*, Spain*, Greece*, U.S and UK.
Countries with 2 consecutive negative q-on-q growths are highlighted with “*” next to their names.

We should add that 4Q2012 GDP figures are preliminary releases, subject to revisions (we expect the US to revise upward) and we also only have data for 18 countries for the fourth quarter so far, and a heavy sprinkling of EU-based entities to boot that could be skewing the numbers to the downside. As the figures roll in during the course of the month/s we will update clients accordingly.

It is clear the U.S is faring far better than most, but one has to question how long she can remain above water with the drag of her economic peers weighing upon her economy. Whilst most long leading indicators for the US are pointing strongly up, the co-incident U.S data is on the brink. We will be watching the two co-incident stalwarts - NBER Recession Model and the GDP/GDI Recession Models very closely indeed.

NOTE : Read the follow-up to this article.

According to the BEA, “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments.”

Below is our preferred growth metric for Personal Incomes, the 3-month smoothed growth rate. Prior spikes in Personal Incomes growth (for whatever reasons) very quickly come back down to earth, even entering negative growth  and there is every reason to suspect the same this time around.

We are therefore not reading too much into this spike, and it is better to focus on the other 3 factors of the NBER Recession Model for the next 2-3 months until this anomaly has been worked away.

Every month, we track the last 4 monthly items mentioned above in our “NBER Coincident Recession Model” which we publish for subscribers. These are affectionately known as the “Big Four” recession indicators and their data is made known on a monthly basis. Real-GDP (GDP deflated by the GDP implicit price deflater) and GDI is however published by the BEA on a quarterly basis, in the month following the end of the prior quarter. Each month thereafter it is re-published as re-estimations (so we have initial estimate, 1st release, 2nd final release.)

It is clear when reading various pronouncements made by the NBER Business Cycle Dating Committee  that the two broadest measures of economic activity, real Gross Domestic Product (real GDP) and real Gross Domestic Income (real GDI) are very important in their determinations, probably more important than the Big-Four. The fact that these are only published quarterly is not an issue for them, since they can pronounce turning points up to 4 quarters later than when the event actually occurred.

In this research note, we investigate methods to utilise GDP and GDI in real-time to estimate recession probabilities in a timely fashion.  These methods have resulted in a monthly “GDPI Report” we publish for subscribers which together with the monthly “NBER Model Report”, provide clients with a robust and timely method to follow all the components the NBER use in business cycle dating determinations. One of the great advantages of the quarterly GDP and GDI figures is that data is available going back to the post-war period, whereas a lot of monthly data is only available from the early 1960′s. This means recession models built with quarterly data are likely to be more robust and taken over many more recessions. A sample GDPI PDF report is available for one-click download right at the end of this research note.

1.GDP Background
GDP is supposed to represent the broadest measure of a nations’ economy. As is taught in  introductory macroeconomics courses, it is possible to think of GDP in two different ways. One is as the dollar value of all final sales of goods and services produced by factors of production located within the United States (classic output-based GDP) and the second is as the dollar value of all the income generated by that production (Gross Domestic Income or GDI.)

The two measures are equal to each other by definition. But in practice, one can try to calculate GDP either using production data or using income data. If we obtain the production and income numbers from different sources, we’re certain to end up with different numbers for what is supposed to be the nation’s GDP. The difference between “gross domestic product” (GDP) and “gross domestic income” (GDI) is simply reported by the BEA as a “statistical discrepancy.”

The appeal of exploiting the information in GDI to date recessions is simple: it is as comprehensive as GDP, but it may capture information about the economy missed by measured GDP. Whilst most economists and business cycle analysts utilise classic  real-GDP to determine recessions, several research papers have shown GDI deflated by the GDP deflater to be much more accurate at signalling recession starts  in real-time. This is because GDI tends to weaken much faster in onset to recession than GDP, providing earlier signals.

The BEA release GDP one months after the quarter has ended whilst GDI for that quarter only gets published a month after that. Therefore a model that deploys both GDP and GDI for economy estimation is desirable from the point of timeliness.

All charts and models from this point on include data up to the 3rd quarter of 2012.

2.Building a GDP Recession Probability Model
The chart below shows real-GDP in relation to NBER defined recessions:

It appears from the above chart that for the most part,  recessions occur when real-GDP dips. We can put this to the test by examining quarter-on-quarter growth rates of real GDP:

We note the occasional false positive (false alarm) when the rate of change dips below the red line and there is no recession, but we also note the occasional false negative (not showing recession when we are in one.) But on the whole this looks to be a pretty decent recession signal. Since quarter-on-quarter is the shortest possible growth rate we can look at, examining other, longer period growth rates should not achieve any additional benefits. This is indeed the case based on a battery of tests conducted by us and and so we will stick with this growth metric.

To get a really good feel for how well this growth metric serves in a recession probability model, we plugged it into a Probit model to display the following recession probability estimations:

The Nagelkerke  correlation coefficient of 0.667 shows a two-thirds correlation of the probability curve to the shaded NBER dates, whilst the Area-Under-Curve (AUC) of 0.918 shows the model correctly categorises the 260 quarters since 1947 into expansion and recession 91.8% of the time. The recession probability trigger is 0.7 (70% probability of recession) shown by the red dotted line. The false positives and negatives are shown clearly and the probability model is rather volatile, even during the course of robust expansions – not something we would like to use to make high-stakes calls.

In reality it’s hard to say from just one quarter’s value for GDP growth what is going on. Our research however has discovered that when including the prior quarters’  growth rate into the probability estimation (i.e. a 2 factor model as opposed to a single factor model), you can achieve a substantial improvement in the probability estimation model (using data further back than 1 quarter does not improve results):

We observe substantial improvements in correlation and AUC and visibly you can see far less flaying about by the probability model which now has a bit more information on which to base its decision. We are also now able to lower our recession-call trigger from 0.7 to 0.6.  We eliminated 2 false positives but introduced another for a net elimination of 1, but we substantially reduced the volatility (uncertainty) in the signal and eliminated 4 heart-stopping near-misses. Quite clearly, the prior quarters growth rate has a huge part to play in the estimation of recession when coupled with this quarters real-GDP growth rate.

This is now a robust model we can use, but not content with the outcome, our research uncovered that we could apply a non-parametric stylised trend-seeking approach to the real-GDP index, as described in detail in an older research piece we did “A Stylized Approach to Recession Forecasting“  This means we can create a “Headwinds index” for real-GDP based on observations of its upward or downward movements over the last 6 quarters (we are not interested in the size of the movements, only the directions):

We note that this method is extremely good at the elimination of false positives (false alarms) and false negatives (when we are in recession it STAYS in recession) and it is much less likely to be affected by data revisions but as with everything there is a price to pay – as a discreet signal it aggregates a lot of informational content about the strength of smaller fluctuations of the economy in various states, seeking only to capture major trends up or down (cyclical Headwinds or Tailwinds) and it is somewhat slow in signalling the end of recessions. But its positives outweigh its negatives and it has important informational content to provide our recession probability estimation model as a 3rd factor:

This remarkable 3-factor model eliminated 3 false positives, 1 false negative and 3 heart-stopping near-misses and has industrial strength correlation and AUC numbers.

3.Building a GDI Recession Probability Model
The chart below shows real-GDI (GDI deflated by the GDP price deflater)  in relation to NBER defined recessions:

Again, as with real-GDP, downward trends seem to be directly related to periods of recession. As with GDP, we can put this to the test by examining quarter-on-quarter growth rates of real GDI:

There are 2 less false positives with GDI and GDI growth signalled some recessions (especially the Great Recession) far earlier than GDP. Let’s have a look at the probability estimation model based on quarterly GDI growth to compare it to that of GDP:

We see that the GDI quarter-on-quarter growth probability model provides better correlation to NBER than the GDP model (0.738 versus 0.667). It also provides a better AUC (0.944 versus 0.918). So we can quantitatively say that GDI provides better recession modelling than GDP. Note how GDI quarterly growth recently signalled recession.

Additionally, our research shows that the prior two quarters’ GDI growth rates also have recession recognition qualities when combined into a 3-factor probability model with the current quarters growth rate (remember that with GDP, only the prior quarters growth provided additional forecasting ability, so GDI seems to contain better informational content about the business cycle):

Again, just looking at quarterly growth rates, the GDI model provides slightly better correlation to NBER (0.897 versus 0.891) but has a marginally lower AUC  than the GDP model (0.986 versus 0.988). However the greater historical informational content allows the GDI 3-factor model to post only 1 false positive in 1978 versus the GDP 2-factor models’ 5 false positives. Also, GDI has one false negative in the 1969 recession whereas GDP has two. This elimination of  false positives and negatives is where the real power of GDI over GDP comes in with the quarterly growth models.

As with GDP, we discovered a highly favourable non-parametric, stylised trend-recognition algorithm for GDI which we combined into a GDI Headwinds Index:

We can see that GDI negative trend momentum just before and during recessions is  higher than that of GDP, with the GDI Headwinds frequenting -2 seven times and -3 twice versus the GDP headwinds that frequented -2 six times and -3 only once. It is very interesting (and disturbing) to note that GDI Headwinds placed a recession call in the 2nd quarter of 2012 (representing April, May , June) which seems consistent with the ECRI recession call. But this is just one factor in a multi-factor model so we would not advise panic just yet. Obviously the GDI Headwinds has forecasting ability to add to the recession model and this is borne out by the statistics in the 4-factor GDI recession probability model (using growth over the last quarter, and the same measurements from the prior two quarters, plus the Headwinds):

This provides a model that scores marginally less than the GDP 3-factor with an r-squared correlation of 0.913 (versus 0.926) and AUC of 0.989 (versus 0.991). However we have 1 false positive versus the GDP models 2. Also the GDI model did not signal a false negative in the 1969 recession as the GDP model did. It is also interesting to note how GDI picked up an early warning signal for the 2008 Great Recession, whereas the GDP model did not.

4. Combining GDP and GDI into a probability model
We have seen 3 factors from real-GDP and 4 from real-GDI that all have strong recession dating ability. The GDP and GDI multi-factor models are both industrial strength, and we would argue the GDI model has the slight edge over the GDP model due to less false positives and negatives. However, how about combining GDP and GDI into a 7-factor model so we have a very broad representation of the economy from both the output and the income side of the equation?

Bingo-the whole is greater than the sum of its parts with the 7-factor GDP/GDI model. If we discount the 1-quarter early signal in 1956 or alternatively move the trigger from 0.5 to 0.6, then we have a model with no false positives, no false negatives and very high r-squared and AUC numbers. In fact it is rare to see probability models with these kinds of statistics. The beauty of this model is that it is deploying two of the broadest measurements of the U.S economy possible, both from the output data and from the income data.

5. Combined GDP/GDI Economic Growth Model
Using the 7-factor  probability model that incorporates 3 factors from GDP and 4 from GDI, we can mathematically extract a new modified representation of the U.S production of goods and services that incorporates the output and the income side of the equation. Note that this is far more sophisticated than merely aggregating GDP and GDI together to achieve a dual-sided representation of output.  We extract a month-by-month growth index (1st chart below) and a cumulative output index (2nd chart) below. These are more reflective representations of GDP for the U.S economy and include the benefits of both GDP and GDI into one index that most accurately describes business cycles since 1947:

6. Combined GDP/GDI Model Reports and Publishing
Although GDP and GDI are published quarterly, they are revised each month. Additionally we incorporate monthly estimations for GDP and GDI to carry us between quarterly GDP/GDI prints to give us a more real-time view. For this reason we update the report every month and publish it in the first week of every new month. The report is available to PRO ($349 per annum) subscriptions only and a new tab has been made available for it next to the NBER Model tab in the MEMBERS download section of our web site.

To download a sample copy of the report dated to 3rd quarter 2012 , click on the below image:

As we stated several months ago when the bears first threatened with downward revisions (see Effects of revisions on co-incident Recession models), there appears to be no clear-cut  reliance that can be placed on co-incident data revisions coming into a recession except to generate false alarms (i.e revise upwards) slightly more than they revise downward.

With the upwards revisions of the last few months coupled with the new highs been made by the big-four indicators for December 2012, we have co-incident recession probability from our NBER Model – confirmation of last resort  falling to around 3.5% We would at the very least require to see a collapse of dramatic proportions in at least 3 of the 4 indicators in January in order for Dec 2012 to be tagged as the business cycle peak. In the meantime the US stock market keeps printing new highs.

RecessionALERT has conducted extensive research into long leading models and have settled on 8 diversified indicators (plus their diffusion) borrowed from various academic research methodologies in addition to those of the late Prof. Moore and new techniques and discoveries made by ourselves. These have all consistently peaked 9-18 months before the onset of recession. We have done all the normal statistical tests for data mining and revisions sensitivity as per the comprehensive testing done for our NBER Model and are satisfied we have something that is robust and can be trusted on the 9-12 month long leading side. In fact we track two models, one inclusive of Fed directly-influenced items and one without. Sensitivity tests have demonstrated that up to any combination of up to 5 of the indicators can be completely removed from the equation or suffer 25% deviations from reported figures and still not influence the outcome of the composite (only modifying the leads and introducing the odd false positive). The composite is equally weighted and is mapped out below. Even though our interpretation of the FED components have been sanitised of about 80% of their extreme manipulations on the long end of curve it still shows the model sans FED influences (“NOFED” model) being far less optimistic than the FED inclusive model.

Our long leading model issued an alert around January 2011 (when NOFED dipped below zero growth) and given its average lead time of 12 months, implied a recession by January 2012, some 3 months after ECRI issued their first  “imminent recession” call (which was subsequently revised to much later over time.) It is now 2 years after that trough and we still maintain we are not in recession yet.  As we follow the black line when it comes to recession calling, you can see the long leading indicator just bounced above zero, narrowly missing the recession threshold, and making strong gains thereafter.

We have deployed our own versions of a Labor market Index, a Housing Index, the Treasury Yield spread and Monetary supply all of which have suffered “structural distortions” or “extreme manipulations”  since 2008. The versions of these components we have developed have been hardened against structural changes, providing near identical signalling to the standard components pre- 2008 and adequately sanitising them post 2008 from structural effects of the Great Recession (removing long-term unemployment components and compensating for labour force participation rates and manipulations by fed on long end of curve for example) The behaviour of these and other components of the model around the last recession and current expansion are shown below.

You can see that Residential Fixed Investment, Housing, GDP per unit-labour cost and corporate profits all paid a visit below the recession trigger between August 2010 and May 2011 effectively dragging their Diffusion Index (which tracks how many systems are in recession territory) into recession territory as well. However the other components kept the black line from going underwater.

We believe any long leading index should have signalled a near-miss recession 9-18 months ago. Why? Because the ultimate co-incident index, Quarterly Gross Domestic Income (in addition to our NBER model)  shows we narrowly escaped recession. We prefer the GDI model since its accuracy is known going back to post war period of 1948 and quite a bit of academic research has shown it to be a superior expression of the economy than GDP. We are certain ECRI lean heavily on GDI as an expression of the economy coincident as opposed to GDP and the chart below probably had a lot to do with their “imminent” recession call in late 2011.

But if we narrowly missed recession, how come so many traditional long leading indicators didn’t even come close to flagging it? The answer is structural changes. The easiest examples of these are with the Treasury spreads and the labor market. As an example of the dangers of deploying long leading models using components subject to structural distortions of the Great Recession and extreme FED manipulation, consider a simple 2-factor long leading composite constructed from  real unemployment (unemployment deflated by CPI)  and the spread between 10’s vs. Fed Funds rate. Below are 3 versions of the model, black being the standard model and green being the model sanitised for structural unemployment changes and blue being the model additionally sanitised from extreme fed influences on the long end of the curve.

You can see the sanitised versions depict prior history with near identical recession signalling accuracy to the standard traditional version but post 2008 shows far less optimistic readings.  The sanitisation is performed for all history on the indicators and not just post 2007 (no picking and choosing allowed). Also these are not simple trend-reduction sanitisations, but justifiable hard metrics for compensation for long-term unemployment distortions/labour force participation as well as removal of fed manipulations on the long end of the yield curve (by analysing a host of treasury spreads and not just the 10′s vs the Fed Funds rate.)

So we see that a traditional interpretation of this model, which by the way has an excellent track record in the past for providing 9-12 months lead to recession, provided a far more optimistic view on its last big trough than the blue line which indicates we actually had a narrow miss. So it is clear you have THREE MODELS that near identically signalled long leads to recession up to 2008/9 and now diverge considerably post 2008/9. They are thus mathematically and statistically ALL VALID MODELS for consideration and therefore, ignoring the reading of the less optimistic models would qualify as a huge oversight. As you can see the 2nd sanitised version signals  a recession near-miss whereas the first traditional model incorrectly implies ECRI’s call was way, way off mark. Now do you think someone with ECRI’s reputation and stakes in the game would really have missed by such a huge margin as implied above by the black line? We think not.

Simplistic tried and tested low-order models with near perfect track records are thus subject to non-trivial risks of future missed calls unless some compensation or risk bands are included to compensate for structural changes of the Great Recession and overtly aggressive fed policies. This is why we prefer deployment of 8 diversified components plus their diffusion, hardened from distortions, to ensure any component unduly affected by said distortions do not present misleading optimistic readings. Assuming ECRI was following a model that maybe dipped below their red line for whatever reason,you can forgive them somewhat for their initial assumptions. In hindsight the call seems out of whack but on the day when the index was hovering below recession trigger on a cliff like downward trajectory and no foresight into the eventual bounce shown on above chart it becomes easier to understand the call.

As we have stated on prior occasions, 9-12 month lead times for recession are not very useful (See “Recession – Just how much warning is useful anyway?“) and we prefer to rely on many other medium, short leading and co-incident models when it comes to inferring stock market actions. You can see recent sample reports from all of them over here. What we will do however is take any recession signal given by these shorter lead models and then confer with the Long Leading model to ensure things tie up.

1. Addition of  Labor Market Index historical data
2. Addition of Long Leading Index historical data
3. New analytic tool & charting visualisations
4. Switch from quarterly to monthly publication

The first two items are self-explanatory and you can read about them and look at their sample reports on the OUR SERVICE menu. The third item is the exciting one for our clients since they can view all 7 major recession models we maintain in a side-by-side fashion during each expansion and recession. This allows detailed inspection of the co-movement of our various short-leading, long-leading and co-incident recession models. In addition, clients can select their favorite RecessionALERT quantitative models and combine them together into a custom composite and view the behavior of the composite and its components over time. This allows financial advisers and brokerage firms to custom-build robust recession models unique to their practice or brand for input into the overall quantitative process used by them to manage their clients affairs.

The data file is available for download from the downloads section in the MEMBERS menu:

After opening the file, you can select your favorite RecessionALERT models for display in the new historical charts. The example below shows an adviser having selected the two powerful long-leading models we maintain, namely the USLLGI and the Headwinds Index together into a composite (“Avg. of selection”), as he/she wants to discuss long-leading equity allocation strategy with his client that afternoon:

All that remains is to select from 5 available date ranges covering all recessions & expansions since 1968, by clicking on the respective tabs :

Clicking on the “1968-1977″ tab, we can observe the behavior of both our selected long-leading growth indices together with their averaged composite, around the 1970 and 1974 recessions. You can see that both the HeadWinds Index and the USLLGI dipped below the zero line, signalling recession within 1 month of each other some 6 months before the onset of the 1974 recession.

Here is another example, where we wanted to observe the co-movement of the SuperIndex with the US Long Leading Index in the 1997 to 2005 period. We see that the USLLGI signaled recession some 5 months before the SuperIndex, which in turn signaled recession  5 months in advance.

The analytic and visualization tools are built into the historical time-series data file, which from 2013 is only available to PRO subscribers.