Recession Predictions

Calculated Risk has a nice discussion going on about the difficulty of predicting recessions.

One of the more interesting charts is the SPX, pre-1990-91 Recession. If markets truly had forecasting abilities, then one would presume they would have sold off in advance of the recession.

click for larger graphic


Instead, this chart shows the index rallied right into the start of the contraction. That is hardly predictive. In this instance, the markets acted coincidentally to the recession, instead of predictively. The beginnings and ends of recessions are marked by The National Bureau of Economic Research, and are based on quantitative data.

Calculated Risk declares recession forecasting a "mug’s game" — but also agrees to play.  He does not see a recession as imminent. That’s consistent with my own expectations for  a contraction  in 2006/07 time frame.

Other sources have had some success with recession forecasting. As one commentor here noted, ECRI has a good record forecasting economic turns.

Yesterday, I linked to Jim Stack (InvesTech Research) recent recession alert, which was reproduced at Forbes. I’ve been a subscriber, and I find Stack’s research very interesting, his track record good, and its costs relatively inexpensive.

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  1. Michael Taylor commented on Mar 29

    Barry, thanks for the link to the CapitalRisk blog and Stack’s recession alert. Great stuff. I’ve created a chart based on the NBER business cycle dates adding the performance gains/losses of the DJ-30 index. This article contains a link to the chart in addition to some statistics regarding business cycle expansions/contractions since 1919:


    Michael Taylor

  2. spencer commented on Mar 29

    Look at the 1987 market crash. It apparently had no economic impact. One, all it was was a valuation correction as in 1962– aanother market crash with no apparent economic impact. Or, two it caused the Fed to abort a tightening already in progress so it actually caused the economy to be stronger.

    Pays your money and takes your pick.

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