Last month's news that the economy grew 2 percent during the first quarter caused many to breathe a bit easier. Recession, it seemed, once again was eluded. But don't relax just yet. According to at least one "leading indicator" - metrics that predict the future health of the economy - we may be in a recession now.
How can it be? A recession is usually defined as two consecutive quarters of negative growth in the gross domestic product. But that definition is only a guideline. The official arbiter of recession is the National Bureau of Economic Research, a nonprofit group of economists. And it usually doesn't weigh in until several months after a recession has started.
That's where things get scary. The last such "official" U.S. recession began in July 1990. Months earlier, though, the respected Economic Cycle Research Institute's leading indicators began heading in the wrong direction, causing the firm to accurately predict the coming recession. Indeed, the ECRI has accurately predicted the past three recessions and, more important, has never issued a false alarm.
The bad news? That same group of indicators - known collectively as the Weekly Leading Index - set off alarm bells two months ago. ECRI economists predicted that America would fall into recession sometime during the second or third quarter of this year. That means it's possible that NBER economists will look back on this moment months from now and tell us that this quarter is when the recession began.
The WLI predicts what the health of the economy will be nine months out, based on measures such as stock prices, money supply, industrial materials prices and unemployment claims. Given its weekly nature and its batting average, the WLI can be a reliable harbinger.
For each of the recessions and slowdowns (economic downturns that avoid an official recession and make a "soft landing") since World War II, the critical moment for the WLI has been eight months after an economic peak. At that fork in the road, the path to recessions and soft landings diverge.
The most recent market peak was in June 2000. So in February, when eight months had passed and the WLI continued to drop, the ECRI predicted a recession.
Things have gotten worse since then. "We're two months past the fork in the road, and we're going the wrong way," says Lakshman Achuthan, managing director for ECRI.
On the bright side, other economists (and their leading indicators) disagree with ECRI's prediction. The Conference Board's Index of Leading Economic Indicators has declined for three straight months - a sign that a recession is coming. However, past false alarms have caused the group to add another hurdle: The annual rate of decline has to hit 3.5 percent before the Conference Board will declare a recession; we're only at -1.2 percent. The Recession Watch index, compiled by economists at Detroit-based Comerica Bank, predicted a slowdown during the first quarter of this year and a pick-up during the second half.
One fact economists agree on: The U.S. economy is now being held together by the purse strings of American consumers. Their buying accounts for two-thirds of the GDP. By watching the next moves of consumer behavior-related "coincident" indicators (which measure current consumer behavior) and "lagging" indicators (which measure past behavior), analysts can better assess which leading indicator was right.
If it's the WLI, the outlook may be bleak. The index has not bottomed out, which may mean not only a recession, but also a long one. If the signs confuse you, don't feel alone. "Smart people have a tough time with this," Achuthan says. "It isn't easy."
