Leading economic indicators and stocks are on a collision course. The recentrally suggests the bear market has bottomed but recent readings for leading economic indicators (LEIs) suggest the recession will be a lot longer and deeper than what the market seems to be expecting.
Indeed, the LEIs are beginning to suggest the recession will be at least as long as the 16-month downturn in 1981-1982. If they are right and the S&P 500 bottoms two to four months before a recession ends, then the current bear market will likely continue until mid to late 2009 (assuming the current recession began July, 2008).
What are the LEIs saying? Lets focus on the 40% decline in the Journal of Commerce Industrial Commodity Price Index since its high in July. Thats the most since 1949 and worse than the declines before every recession since then, said Bloomberg.
The collapse in the index shows a collapse in the manufacturing sector. The industrial sector, which was helping to keep the recession relatively mild, has completely given way and now we need to be prepared for a much more severe recession, said Lakshman Achuthan, managing director at the Economic Cycle Research Institute, which compiles the Journal of Commerce data. It’s at least going to look something like what we saw in the early 1980s, but it could be worse.
The Bloomberg article adds: The commodity decline coupled with economic data signal the current slowdown will last at least 16 months and spur slowdowns globally, not just in the U.S. and Europe, ECRI’s Achuthan said. The slumps of 1990 and 2001 lasted eight months, according to NBER data. ‘As is usually the case, the commodity index is ahead of consensus right now and indicating just how deep and how long this global recession will be,’ Achuthan said.”
ECRI has one of the best forecasting records within the economics fraternity, in my opinion. It was founded by Geoffrey Moore, father of LEI analysis (and professor to Alan Greenspan). ECRI is perhaps the only organization to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm, said the Economist magazineback in 2005.