Tuesday, October 11, 2011

Look Out Elizabeth, Here Comes the Small One!

Recently ECRI (Economic Cycle Research Institute) announced that the U.S. economy was soon going into recession. This is a huge prediction. ECRI has the best business cycle model in the world. They are very accurate in predicting economic downturns. This negative forecast is supported by several other analysts citing various economic indicators that are signaling an imminent recession.

So this means the economy is definitely headed for recession, right? Not so fast “bear-boy”. There are other indicators that should be much more negative now if we are headed for a dip. And most importantly, the greatest investor in the world, Warren Buffet, says we are definitely not going into recession.

ECRI says definitely yes and Buffet says adamantly no. This is an economic smack down of epic proportion. The best model versus the best mind --- It’s on!

This is the mother of all mixed signals. To gain perspective it is important to remember how we got to this point. There was significant damage to the financial structure and credit markets. The housing industry suffered severe calamity. Layoffs spiked and the economic collapse created a structural unemployment problem. Because of all these problems and the severity of the recession, the recovery was expected to be long and slow.

We are getting exactly the recovery that was expected and the recovery that we deserve. This isn’t good enough for many commentators and news outlets that report a steady stream of negative economic news. The problem is that recessions have a psychological aspect. If you constantly tell people that the economy could go into recession, they stop spending money and it results in a recession. Consumer confidence numbers right now are terrible. So if we do go into recession, the negative atmosphere is probably was a contributing factor.

As I have previously stated, our slow recovery was further hurt by bad weather (snow, rain, hurricanes and tsunamis), bad gas (high prices), world uncertainty (the Arab Spring) and my big, fat, Greek default (possible). And we are being guided through the most tenuous economic situation in over 70 years by a president with no business experience, no business acumen and no business skills. Worse yet, he is either very stubborn or a slow learner (you make that call).

The recent stock market correction appears to be a payback for the extraordinary actions taken to stabilize the economy in 2008-2009. Most models (including the Model T) indicated the stock market should have gone lower than it did. While the magnitude of this correction was unexpected, the stock market dip is not a big concern. The Model T indicates that the stock market will be back to its July 2011 peak in Q3 of 2012 – a long, slow, climb.

So which of the economic titans is going to be correct? I have stated in previous posts how this unique economic situation, with the extreme actions of the Fed, has caused usually reliable indicators to be wrong. Could this be happening to the stellar model of ECRI? We will soon find out. The Model T, which is supposed to be a predictive model, is currently moving in tandem with the stock market. It is possible that the ECRI model is reflecting what is currently happening (a slowing economy) instead of a future slower economy. And Buffet? You don’t make billions by being very wrong in key situations.

My Call

My panel of economic experts is forecasting GDP growth of 1.9% in Q1, 2012 and 2.8% in Q2. However, the panel has been too optimistic by 1.5 to 2 points for the past several quarters. Therefore, expect a GDP of near 0% (could even be negative) in Q1, 2012 and near 1% in Q2. Not technically a recession, but oh so close. This would mean that Buffet would be correct, but there would be no reason to celebrate.

I am working on a new model based on non-commercial transportation (call in Model-T Jr.). This model says we are on the edge of a recession, but the next data inputs will determine if it indicates recession or just near 0% growth. The Model T is now predicting moderate, instead of robust, growth in 2012.

The good news is that the economy is moving so slow, we don’t have very far to fall. That’s right; the recovery has been so anemic we can’t even have a decent recession! If we do have a recession, it will be like when Dick Cheney has a mild heart attack. Yes it’s bad, but we will hardly notice it and may not even feel a thing.

Fred Sanford -- The Big One!

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