For months now, investors have been bombarded with so many reports of a recession ahead that the markets have seemed more than a little shell-shocked. But while the media have fixated on the gloomiest forecasts, most economists actually predict moderate economic expansion.
The Economic Cycle Research Institute (ECRI), made waves on September 30, 2011, when it announced that, according to its data, an economic downturn was nigh. “The most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not ‘soft landings,’” ECRI said. “The U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.”
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Three months later, ECRI stands by its prediction, and sooner or later it may come true. But in the meantime, investors may want to note three key points that say as much about how economic hype propagates in today’s hyper-connected environment as they do about the underlying economy itself.
1. “Secret” methodologies are hard to trust.
ECRI economists made their reputation by calling the bottom of the 2007-2009 recession in March 2009—and again in 2010 for saying no “double-dip” recession was imminent. But they have been vague about exactly which “forward-looking indicators” are making them so nervous. Their methodology is proprietary, a secret to all except the firm’s clients.
At the same time, the indicators the rest of the world has to work with give no clear signal of a recession ahead. Denver economist Fritz Meyer, a 35-year veteran of the industry, notes that according to the more established index of Leading Economic Indicators—published by the Conference Board for the past half-century—the economic environment seems to be improving. “The risk of economic downturn has receded, and the forward-looking economic data has actually picked up a little bit,” Meyer says.
Meyer and other independent economists can check the Conference Board’s work and judge the results for themselves, but ECRI’s calculations remain a “black box” opaque to third-party verification.
2. Other economists see no recession on the horizon.
In contrast to whatever ECRI has seen, economic numbers from the Conference Board remain fairly strong. New factory orders from the Institute for Supply Management have actually improved during the past few months, for example, and vehicle sales, commercial lending, and non-manufacturing economic activity all picked up during the past quarter.
In fact, no significant economic gauges have turned downward. “Economists continue to believe that the U.S. economic expansion will continue at a relatively robust rate,” Meyer says, citing a December Wall Street Journal survey revealing that, on average, industry professionals suspected gross domestic product (GDP) growth would rise to nearly 3% in the fourth quarter.
That doesn’t mean ECRI’s secret recession recipe won’t eventually be borne out. But in the meantime, publicly available numbers reflect the opposite of what is normally considered a recessionary environment.
3. Timing is everything. Timing the market is not.
Three months after ECRI’s September recession prediction, it still weighed on investor sentiment, perhaps because ECRI had declined to provide a timeline for determining whether its call was right or wrong. In September, the group said the United States was on the “cusp” of a full-blown downturn, which would indicate some urgency. By mid-December, however, ECRI’s time frame had softened to “sometime next year.”
Recessions, like expansions, come and go, and there will inevitably be additional downturns, so ECRI was right on that front. But by moving the scope of its call further and further out, the forecasters have kept investors on edge, leading many to withdraw from investment markets to wait for brighter days ahead.
The problem, though, is that investing isn’t something people do only when outside conditions make it convenient. It continues throughout the ups and downs of the economic cycle. And since September, the U.S. economy has shown every indication of continuing to expand, and financial markets, though volatile, have reflected that expansion.
The Standard & Poor’s 500, a broad gauge of U.S. stock prices, climbed 8% between the time of ECRI’s initial forecast and mid-December. An investor who fled to the sidelines to avoid that “full-blown recession” would have lost out on that appreciation, the equivalent of nearly a year of normal performance for large-cap shares.