I’ve been asked several times about the recent ECRI recession call (obviously I disagreed with their incorrect recession call in 2011 – I wasn’t even on recession watch then and I’m not on recession watch now – and I also think ECRI is wrong about a recession starting in mid-2012). …
It seems to me ECRI is trying to make this an academic exercise and hoping for some significant downward revisions. Right now the data doesn’t indicate a recession in 2012, but, as Menzie Chinn notes, “all of these series will be revised, so one wouldn’t want to state definitively we are not in a recession – therein lies the path to embarrassment. But the case still has to be made for recession.”
But why do we care? …
Why is there so much focus on the business cycle? For companies, especially cyclical companies, the reason is obvious – it helps with planning, staffing and investment.
But why are investors so focused on the business cycle? Obviously earnings decline in a recession, and stock prices fall too. The following graph shows the year-over-year (YoY) change in the S&P 500 (using average monthly prices) since 1970. Notice that the market usually declines YoY in a recession.
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So calling a recession isn’t just an academic exercise, there is some opportunity to preserve capital.
Note: From June 2015: ECRI Admits Incorrect Recession Call
CR Note: I will be returning on October 21st (unless I change my mind or get lost), and I should start posting soon. Best to all!