2012 Recession Likely

A recession in the US is likely according to indicators used by John Hussman of Hussmann Funds and the WLI (Weekly Leading Indicator) growth by the ECRI.

John Hussman created a chart (below) corresponding to the average of standardized values (mean zero, unit variance) of the following variables:

• 6 month change in S&P 500
• 6 month change in nonfarm payrolls
• 12 month change in nonfarm payrolls
• 6 month change in average weekly hours worked
• ISM Purchasing Managers Index
• ISM New Orders Index
• OECD Leading Indicator - total world, 
• OECD Leading Indicator - US, 
• ECRI Weekly Leading Index growth
• Chicago Fed National Activity Index 
• 3 month average, credit spreads (Baa vs 10-year Treasury), 
• Industrial commodity prices - 12 month and 6 month change
• New building permits 6 month change.

Here's the chart between 1952 and 2011.

The level we currently get (-0.5) has always been associated with recessions, except with the false positive in 2003, right after the 2001/2002 recession. It correctly predicted or coincided with 10 recessions, never missed one and gave one incorrect signal as previously mentioned.

The WLIG currently stands at -8.4 (6 Jan 2012), a level usually associated with recession. ECRI insists however they use other leading indicator to make a recession call. That's why they did not make a recession call in 2010, but did make one for 2012.

There is now a fair amount of optimism in AAII survey (~50% bullish), although its' not extreme yet, and lagging indicators give a positive outlook for the US economy, so those recession calls still have many critics, but I believe they will eventually be proven right this year.