Have We Avoided A Recession?


2011 is nearly complete, so it is time to look briefly behind us and look forward to the new year. Somehow, through some minor miracle, the American and global economies avoided recession this year. Yes, I know, “recession” has become a relative term. It’s well nigh impossible to tell the difference between the “slow” GDP growth we’ve got now and another downturn. However, a recession implies an actual contraction in economic activity, and all that entails—job losses instead of paltry gains, yet another downturn in the housing market, another nosedive in auto sales, and so on.

The “good times” of 2011 are behind us and 2012 lies ahead. What will the new year bring? John Hussman recently asked have we avoided a recession?

In recent months, we’ve observed a fairly neutral flow of economic data — not strong by any means, but offering a reprieve from the clearly  negative momentum that we observed in late-summer.

The following chart  is presents a consensus of economic measures that we track as a  composite (long-term chart here),  focusing on the past decade. Note the bounce toward zero that we’ve  seen in recent months. New orders remain generally weak, but other  measures are dead-neutral. Note that we saw a similar pop for a few  months just as we were entering the last recession in 2007. Modest  upticks in these measures – even if concerted – don’t carry much  information.


And while this graph appears to show there is no cause for alarm, Hussman still sets the chances of a recession in 2012 at about 85% (in another graph not shown here). That prediction is based on his analysis of the economic indicators.

We use a variety of methods to gauge recession  risk. The most straightforward is to form fairly low-order indicator  sets like our Recession Warning Composite (see November 12, 2007, Expecting A Recession),  that have a long historical record of accurately distinguishing  recessions. These indicator sets are comprised of what might be called  “weak learners” — conditions that do not in themselves have infallible  records of identifying recessions, but that provide very strong signals  when observed in combination with other recession flags. They include  fairly straightforward conditions such as whether or not the S&P 500  is below its level of 6 months earlier, whether credit spreads are  wider than they were 6 months earlier, whether the Purchasing Manager’s  Index is in the low 50’s or below, and so forth.

As of last week, a simple average of 20 of these  binary recession indicators continued to show a preponderance of signals  still in place — a condition that has never been observed except  alongside a U.S. recession.


This is the calm before the storm according to Hussman, which is is bad enough if we consider only the United States. But then there is a possibility of a global contraction led by the troubles in Europe and the ever-more-obvious downturn in China. Hussman provides charts to document those catastrophes in the making. What would happen to the American economy in the context of a global recession? More specifically—

  • What would happen to America’s already unhealthy import/export balance?
  • What would happen if contagion in the global finance system spreads to this country?

And then there are oil prices, which now exceed $100/barrel. If there is a global recession, we might expect demand to fall off and prices to decline. However, those prices are undoubtedly helping to push us into another recession.

If we add all of these factors together, it appears that a new recession is all but inevitable. Thus it appears we will not escape “unscathed” in 2012 as we did in 2011. (I am not talking about the Mayan Prophecy  Smiley_glasses) It appears that serious damage is going to be done next year, not only in Europe and China, but right here in the United States. This would harm many, many ordinary Americans, not only in the short-term but over the long haul. In a recent post Little Hope and Not Much Change, Financial Armageddon’s Michael Panzner cites a new study which foreshadows the long-term damage which might occur.

The John J. Heldrich Center for Workforce Development at Rutgers University has published an updated working paper, Categorizing the Unemployed by the Impact of the Recession, detailing the results of surveys conducted from August 2009 through  August 2011 of American workers who lost a job during the height of the  Great Recession…

Heldrich_center_for_workforce_panznerJust 7% of the unemployed initially  contacted by the Heldrich Center in the summer of 2009 have made it back  to where they were before the recession. And just another 23% are  on the way back — they have experienced a minor downward change in their  quality of life that they believe will be temporary. Another third of  those participating in the initial August 2009 survey can be thought of  as downsized. Many here (11%) have taken a minor quality of life hit and  say their financial situation is poor, but believe they will work their  way out of it in time. Another 10% are in at least fair financial shape  but report a minor downward change in their lifestyle they believe will  be permanent.

The remaining 36% speak of cataclysmic  effects of the Great Recession on them and their families. They comprise  two groups, both of whom can be said to have been devastated. We  consider 21% to be devastated because they are in poor financial shape  and have suffered a major quality of life change, even if they believe  it to be temporary. Also included in this group are respondents who  report being in fair economic shape, but who have experienced a major  decline in their lifestyle they expect to be permanent. Finally, there  is a sizeable 15% who appear to have been wrecked by the recession. They  are at the bottom on all three measures — they are in poor financial  shape, have suffered a major change in lifestyle, and believe this new  state of affairs will be a permanent condition.

Even if a new recession is not as severe as the “Great” one, it would still hurt those who are “climbing back,” or who were “downsized” or “devastated” in the aftermath of the financial meltdown in 2008. A new recession would further push millions of Americans into poverty or out of the Middle Class, and these injurious changes could be effectively permanent. So we need to take the prediction of a new recession very seriously indeed.

I’m sorry to tell you about this impending Bad News, but that’s just the way it looks.

Decline of the Empire