Structural Distortions Hazardous To Recession Forecasting
Dwaine van Vuuren | Jan 15, 2013 01:32AM ET
Very few people realise just how close we came to a recession in the past 12 months, purely on an economic indicators perspective and not counting external risks such as the Fiscal Cliff debate. However, many traditional long leading indicators based on for example the yield curve and the unemployment rate, belie just how close a shave we had.
This is because of deep structural changes and/or distortions brought about by the Great Recession of 2008. As it is, most long leading indicators bounced smartly off their respective troughs meaning that even if the NBER were to declare recession, it would be the shortest and mildest on record. However, should conditions have continued to deteriorate a little further for the long indicators, it is quite feasible that long leading recession models heavily reliant on yield curves, treasury spreads and unemployment rates would have completely missed the recession call due to their falsely bullish readings. Failure to make allowances for these structural changes can therefore be hazardous to your recession forecasting efforts.
RecessionALERT has conducted extensive research into long leading models and have settled on 8 diversified indicators (plus their diffusion) borrowed from various academic research methodologies in addition to those of the late Prof. Moore and new techniques and discoveries made by ourselves. These have all consistently peaked 9-18 months before the onset of recession. We have done all the normal statistical tests for data mining and revisions sensitivity as per the comprehensive testing done for our here . What we will do however is take any recession signal given by these shorter lead models and then confer with the Long Leading model to ensure things tie up.
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