A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.


In 2011, you called for a recession that never happened - does that point to a flaw in your research?

We’ve looked at this question closely, and the answer is no.

Our directional call for a cyclical downturn in growth was correct, and the 2012-13 growth rate cycle downturn turned out to be the worst “non-recession” in over half a century. The reason it didn’t became a full-blown recession is because of something that’s unlikely to be repeated.

Most think it was the Fed’s actions (which reflected our assessment of cyclical risk) that prevented a recession, but our research shows that the real reason was the “Greater Moderation.”

Basically, U.S. economic cycle volatility collapsed, in large part because of a few years of very stable oil prices.

As the former head of BP’s global economics team noted in mid-2014, “the oil price has been above $100 for three years in a row, the highest … such period ever, but extremely stable, the lowest three-year volatility since 1970,” when prices were fixed. While there were supply disruptions, “[t]he cumulative level of these disruptions over the last three years is balanced almost one by one, almost barrel by barrel, by the increase in tight oil production in the U.S. So it’s an absolute fair statement to say [that] if we had only had the disruptions … you would have seen oil prices shooting up.”

Thus, despite a fairly normal pattern of supply disruptions, oil price volatility fell to a four-decade low in 2011-13, in large part, because of what’s been called the fastest ramp-up in oil production in history, creating an unusual period devoid of oil shocks.

In other words, the cyclical recessionary “window of vulnerability” was wide open, as shown by our leading indexes, but the oil shock didn’t happen despite the usual supply disruptions. The end result was the worst non-recession ever. And our leading indexes have correctly called the growth rate cycle upturns and downturns ever since.

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I have to pay attention to those people and indicators that have pointed in the right direction - even when they've gone against the crowd (and my opinion at the time). One such outfit is the Economic Cycle Research Institute, whose various leading indicators actually have done just that - lead where things were headed.
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