Currently, RecessionALERT subscribers deploy the Recession Forecasting Ensemble (RFE) to match their equity allocation to recession risk. But the assumption in our RFE research note was that you would simply “buy and hold” the stock market during periods of low recession risk. This provided for far superior risk-adjusted returns across many business cycles, but you [...]
Estimating recession probabilities using Gross Domestic Product & Income
” The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” - http://www.nber.org Every month, [...]
Structural distortions hazardous to recession forecasting
Very few people realise just how close we came to a recession in the past 12 months, purely on an economic indicators perspective and not counting external risks such as the Fiscal Cliff debate. However, many traditional long leading indicators based on for example the yield curve and the unemployment rate, belie just how close [...]
Effects of Revisions on Recession Forecasting
Economic time series used in measuring business cycles and forecasting recessions are subject to revisions and re-benchmarking. Over time, more up-to-date and accurate data become available and time series are revised to reflect the updates. Some economic time series are subject to more drastic revisions than others. For example, the unemployment rate is subject to [...]
The NBER co-incident Recession Model – “confirmation of last resort”
NOTE : AFTER READING THIS, ALSO TAKE A LOOK AT : “The effect of data revisions on the NBER recession model” and “Estimating Recession Probabilities using GDP/GDI” The National Buro for Economic Research (NBER) are the final arbiters of recession dating in the U.S. They take forever to proclaim specific starts and ends to expansions so [...]
Recession Forecasting Ensemble (RFE) and market timing
The Recession Forecasting Ensemble (RFE) is a collection of 6 powerful diversified recession forecasting methodologies that differ in data, mechanics, approach and theory to offer us an over-arching recession dating and forecasting methodology that is resilient to individual “model risk”. There is no “one size fits all” mathematical model that performs well in the past and is [...]
The SP-500 Great Trough Detector Project
The SP-500 Great Trough Project is a technique where we deploy market breadth to determine favorable points in time for investors to “buy on the dips” on the U.S stock markets, more specifically the SP-500. We make reference to a “Great Trough” as rare, large correction reversals on the SP-500, normally spawning a new bull-market leg, or at least [...]
The Shadow Weekly Leading Index Project
NOTICE : The Shadow WLI Project has been running since 1st June 2012 and we consider the out-of-sample results to be a resounding success from the accuracy charts below. We update the public charts on these pages from time to time, but regular updates are part of a RecessionALERT annual subscription. IMPORTANT : The Shadow [...]
Predicting recession with U.S state co-incident indicators
Common knowledge tells us that to forecast recession with some lead (advance warning) means we need to use leading indicators. However a special characteristic of the 50 state-wide co-incident indicators maintained by the Philadelphia Fed allows us to build an early warning system for recessions. In our previous research titled “Dating NBER Recessions with Philadelphia Fed State [...]
A Stylized Approach to Recession Forecasting
The traditional method for recession forecasting is to find an economic indicator or composite index that has a high correlation and adequately responds in advance to economic expansion or contraction. One then de-trends this indicator by taking a growth rate (straight or smoothed) over x-months and plotting that on a chart. When this growth rate [...]
Recession: Just How Much Warning Is Useful Anyway?
At the end of September 2011, ECRI made a recession call which left the impression recession was imminent. With a track record like theirs there was very little challenging argument. Two days later, the S&P-500 bottomed and rose and incredible 22% since. In December 2011, ECRI “dialled down” their call to “within 9 months”. Just [...]
The New Conference Board LEI: First Look
The much anticipated Conference Board LEI revision is out. Many people were fearing that the removal of M2 from the composite would plunge it into recession territory, but that is not the case. Our own investigations into this matter in the lead up to the announcement revealed as such, but it is comforting to receive [...]
Further Improving the Use of the ECRI WLI (Part-II)
This article was co-authored with Georg Vrba and first appeared on the popular Advisor Perspectives web site on 17 January 2012 In our last article on using the ECRI WLI, we described how best to use the growth figure of the Economic Cycle Research Institute’s Weekly Leading Index (WLI) to predict recessions, but we also highlighted [...]
Using the ECRI WLI to Flag Recessions (Part-I)
In September 2011, the Economic Cycle Research Institute proclaimed a new U.S recession would begin sometime in the coming year. ECRI based its prediction on a host of its own internal long-leading indexes, together with its widely followed weekly leading index (WLI). I do not wish to debate the merits of ECRI’s recession call here [...]
Dating NBER Recessions with Philadelphia Fed State coincident indices
Further exploration of the work done by Jason Novak, “Marking NBER Recessions with State Data”, Feb 2008 available from http://www.philadelphiafed.org. We extrapolate Novak’s diffusion-based recession dating model to include the 2008 great recession to gauge its “out of sample” effectiveness. We then explore an alternative method to diffusion in using state coincident indices that produces [...]
