Friday, October 23, 2009

If the Peak in the First Derivative of Economic Growth is Here, Will Investor Sentiment Cool?

The fine forecasters at the Economic Cycle Research Institute more or less rang the bell at the bottom of the market when their publicly-disclosed growth index cycled to a new low. Has it peaked, and is it the start of a "correction"?

US Recovery to Gain Strength Through New Year

October 23, 2009

Slower housing activity pulled a weekly index of future U.S. economic growth lower in the latest week after it touched a record high the week earlier, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 127.9 in the week to October 16 from 128.1 in the the previous week.

"Despite a dip, WLI growth remains close to the previous week's record high, suggesting that the U.S. economic recovery will continue to gain strength through the New Year," said ECRI Managing Director Lakshman Achuthan.

The index's yearly growth rate fell to 27.2 percent from the previous week's revised 27.8 percent, which was originally reported at 27.9 percent.

The index has shown annualized economic growth at record highs since September. That's a turnaround from earlier this year, when the growth rate was sharply negative.

As suggested here, mathematically the mature U. S. economy may well have seen the first derivative of growth prospects peak. The stock market may follow in a typical post-end of recession rally correction.

Meanwhile, the often-correct, often-early Nouriel Roubini has resurfaced singing the same song, warning of irrational exuberance with an interview subtly titled Nouriel Roubini: Big Crash Coming (not that he writes the title of the report). A sense of cyclicality suggests that since "no one" pays attention to him because of asset price inflation in the stock market, perhaps it's time to listen.

He dislikes gold and has been wrong on this asset class throughout the past two years, whereas he has been prescient on the more important economic matters.

While NBER will officially date the end of the economic banana a long time from now, it is likely that absent government incentives, it wouldn't be so clear that it has ended (if it has). Witness the U. K.'s third quarter economic report in U.K. Economy Unexpectedly Shrinks in Longest Slump:

“This is desperately disappointing news, especially given that it was hoped that a modest recovery had begun,” said John Philpott, chief economist at the Chartered Institute of Personnel and Development. “The U.K. economy is continuing to shrink, with six quarters of contraction in output making this recession look more like a depression.”

A few bloggers, such as Ed Harrison of Credit Writedowns and I have used the "d" word to describe the U. S. downturn. The higher-profile Paul Volcker has used the euphemism "Great Recession", which means the same thing but is more politic. It is good to see the reality of what has happened and is still happening be acknowledged, gradually, in the MSM. It's a start to the healing process. But only a start.

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