Previous posts have discussed the US recession-warning properties of real narrow money (i.e. currency in circulation plus demand deposits divided by consumer prices). 10 of the 11 post-WW2 downturns identified by the National Bureau of Economic Research (NBER) were preceded by a contraction in real money. The exception was the 1953-54 recession, apparently caused by severe fiscal tightening as defence spending was slashed after the Korean war.
On the basis of this record, posts in 2010 and 2011 expressed scepticism about forecasts at the time – for example by John Hussman* – that the economy was about to enter another recession. Real narrow money grew robustly during 2010-11.
Real money has slowed since late 2011 but was still up by a solid 4.3% (not annualised) in the six months to April – see first chart. Recent posts, therefore, have suggested that US growth will fall back during 2012 while remaining respectable.
Monetary trends, however, bear close scrutiny. Real narrow money was flat between January and April. The latest nominal figure – for 7 May – was 1.8% below the April average, although the weekly series displays considerable volatility.
Also generating some concern here is a recent fall in the Monster index of online job vacancies – the decline in March and April was the largest since the end of the December 2007-June 2009 recession. The index turned down sharply just before the onset of that recession – second chart. (This weakness, however, is at odds with several other labour market leading indicators.)
At the time of writing, the Intrade prediction market was discounting a 16% probability of a recession in 2012, defined as two consecutive negative US GDP quarters between the fourth quarters of 2011 and 2012. The judgement here is that the probability remains well below 50% but is greater than 16%, especially given the risk of spill-over from an escalating Eurozone crisis.
*In his weekly market comment (link to left) of 28 June 2010 Mr Hussman wrote: “Based on evidence that has always and only been observed during or immediately prior to US recessions, the US economy appears headed into a second leg of an unusually challenging downturn.” The comment of 8 August 2011 stated similarly that “the composite of economic and financial evidence we presently observe has always and only been associated with ongoing or immediately impending recessions”. Mr Hussman now expects the NBER to judge that a recession started in May or June 2012, suggesting that one was not “immediately impending” in August 2011.
