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Thursday, April 11, 2013

Interesting recession probability chart

The ECRI has had a great history of calling starts and ends of recessions before most economists.  However, they have been calling for a recession since Sept. 2011 and yet it is not clear if we are even there yet.  There is a lot of data that looks like it does in a recession, but some that does not.  I think this chart is pretty interesting.  Check it out.


The current period in time is different then any other post WWII recession.  After every other recession the probability chart spent some time very near zero.  Some recoveries spent long periods of time very near zero.  The current recovery never approached zero, and has been above 10% most of the time.  It has even crossed above the 30 level twice.  Only 2 times (red circle areas) out of the prior 10 recoveries was the 30 level breached and subsequently dropped back below 20 without the economy heading going into a recession.  Since the second breach of the 30 level it has not dropped back below 20 yet.

Compare the recession probability at the 2000 top to the 2007 top (blue circled areas).  The probability was near zero in 2000 and over 40 in 2007.  Despite the elevated recession risk in 2007 people piled into the market on margin.  Does that sound familiar?  Even though recession odds are not as high now as 2007, we have had a second breach of the 30 level which has always led to recession in every post WWII recovery.  Recession risk is elevated and yet people are piling in again on margin.

There is another interesting feature on this chart.  Look at the 1987 time period (yellow circled area).  The crash of 1987 did not even cause a blip up in recession probabilities.   The economy was so strong in those days a market crash essentially had no lasting affect.

I really like this chart.  It is from a subscription based site.  I suspect if it breaches the 50 level and they think we are starting a recession they will make it public so they can get the glory for the call.  At least I hope so, it would be very useful information. In the mean time we need to keep in mind we may be on the way to a recession.  I think the probability needs to drop back under 20 to be safe.  The trouble is I probably won't see the chart if that happens since I am not a subscriber to the service.  If anybody sees this chart I would appreciate them letting me know.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.