Three Signs We're In A New Recession

Category: Breaking News Published on Monday, 01 October 2012 15:35 Written by Huffingtonpost

Breaking news about the economy, everybody: It still stinks. The good news? At least we're not in another recession.

Some of you may think we never left the last recession, and that's understandable. Others will ask, who cares? The economy is so lousy that there's not much difference between recession and growth. Also understandable.

Recently, Wall Street has been chattering about the possibility that a new recession has already begun. Last week we saw a report on the big plunge in demand for long-lasting goods made in U.S. factories in August, which raised recession alarms.

The week before that, the Philadelphia Federal Reserve said a little-watched index of mid-Atlantic business activity had also tumbled in August, which some observers warned was a recession signal.

The Economic Cycle Research Institute, a private research firm that tracks leading economic indicators, has been warning that a new recession is coming for more than a year now. It still hasn't backed down from that call -- in fact, ECRI chief Lakshman Achuthan said we are in a recession as we speak. The ECRI has a decent track record, or at least it has convinced Wall Street that it does, so it has gotten a lot of attention with its call.

Europe is already in a recession, which has crushed global trade, including the U.S. export sector -- something we've already seen reflected in fairly weak factory readings this summer. Economic growth has bumped along well below 2 percent so far this year, meaning it is vulnerable to shocks.

"It's rough out there," said Jeffrey Rosen, chief economist at data and research site Briefing.com. Rosen thinks the economy may have grown at a rate of less than 1 percent in the third quarter, "on the margin of error of being in recession."

So far, though, most economists doubt that a new recession has begun. Most economists, of course, are usually the last people on earth to get word of changes in the economy. But the evidence is on their side so far.

That could well change as we get closer to the end of the year, if Congress doesn't deal with the "fiscal cliff" of higher tax rates and looming government spending cuts when the calendar flips. There are already anecdotes floating around about businesses being more cautious ahead of that moment. The sentiment will only get worse as the end of the year draws closer. Nobody thinks the economy is safe and sound, least of all the Federal Reserve. If it did, it wouldn't have embarked on another round of bond-buying to try to stimulate the economy.

But there is still some solid evidence that suggests we're not in a recession -- yet:

1. ISM Manufacturing:

The Institute for Supply Management on Monday said its index of U.S. factory activity rose to 51.5 from 49.6. Any reading above 50 indicates expansion in the factory sector. The new reading is the ISM's best in four months and the first to show factory output expanding since May. Better yet, the ISM's index of new factory orders rose, while its index of inventories fell. When businesses are placing new orders and working down inventories, this is usually a pretty good sign that factories are going to be producing more stuff in the months to come. Not since 1973 has a recession begun in a month when the ISM index was above 50.

2. Weekly Jobless Claims:

New weekly claims for unemployment benefits are a sensitive leading indicator. Changes in the economy are typically reflected in how businesses hire and fire workers, and usually pretty quickly. "If we're falling into a recession, one of the first things to react would be jobless claims," said Dan Greenhaus, chief global strategist at brokerage firm BTIG. Since the recession, jobless claims have stayed annoyingly high, refusing to fall back to their pre-recession level of about 300,000 per week. But they have been drifting lower. Last week, they decreased to 359,000. And the four-week moving average for the claims, which smooths out weekly peaks and valleys, has drifted down to about 374,000, down from a peak of about 650,000 during the recession. Since 1965, we have not had a recession without a corresponding spike in jobless claims. That's not to say it's impossible to still get a recession -- after all, so many people are already unemployed that it's hard to imagine we'd get another huge wave of layoffs. But this would be a first.

3. Consumer Confidence:

If consumers were feeling a sudden squeeze in their finances or getting jittery about their jobs, then it would have an effect on their confidence. But confidence readings -- while still painfully low -- have been grinding higher this year. Recently, the Conference Board, a private research firm, said its consumer confidence index rose to 70.3, nearly the highest level since the recession ended. Recessions can begin when consumer confidence is rising, but not usually. In fact, a better (and possibly false) recession signal came last year, when consumer confidence tumbled sharply, from its post-recession high of 72 down to about 40. It has been recovering ever since.

4. Housing:

The housing market, which led us into the last recession, has been so decimated that it's hard to imagine it getting much worse. That means it might not be the world's strongest recession indicator. Still, by most measures housing has been improving steadily in recent months. The National Association of Home Builders' index of home-builder confidence rose last month to the highest since June 2006, more than a year before the recession began. New-home construction has dribbled higher, hitting a rate nearly double its recession low in August. And home re-sales were at two-year highs in August. We could still get a recession with a strong housing market, but, again, it's not likely.

5. Car Sales:

We'll get fresh data on September car sales on Tuesday, but so far this year the trend has been encouraging: Car sales have risen steadily from their recession bottom to an annualized rate of nearly 14.5 million units in August. That's the highest since April 2008, if you don't count the one month, August 2009, when sales were given a steroid injection by the Cash-For-Clunkers program. It would be unusual to see a recession begin at a time when car sales are marching steadily higher.

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