When is a recession not a recession going to be a recession?

A few short weeks ago there was no doubt in the press that recession was upon us. The perma-bears, who have been calling for the Big One for nearly two years now, have declared that it's finally upon us. I had a lunch with Nouriel Roubini in February gloating over his pilaf about his prescient call (the less charitable might describe it as "broken clock" prescience.)

All of a sudden, however, a recent flurry of economic news has led to speculation that we're not in recession after all. And we might even avoid one.

So who is right? Of course both side will claim victory. Are we in recession? Depends on how you define your recession.

By now, everyone is familiar with the 2-quarters-negative-growth = recession "definition" that "they" use. It turns out, though, that this definition is garbage. Woefully inadequate and misleading.

The idea originated in a 1974 New York Times article by Julius Shiskin, who provided a laundry list of recession-spotting rules of thumb, including two down quarters of GDP. Over the years the rest of his rules somehow dropped away, leaving behind only "two down quarters of GDP."

Barry Ritholtz, in his recession declaration, uses the two-quarter rule, but does his own adjustment to the data to make it illustrate negative growth.

Is there a better way to look at it? You bet. Long time readers of this blog will know that I refer to the weekly data published by ECRI, and it is to them that we turn for the clearest, most data-driven view. Economic data ebbs and flows. Some is useful for looking forward, some looks backwards. Employment levels, for example, tend to lag the economy. (It's hard to lay people off, so the jobs go only after the rest of the pain has already set in.) If you bundle up enough of the leading indicators, coincident indicators, and lagging indicators you can see when recession is coming, when it is upon us, and when we've climbed back out. Today, the picture looks like this:

Leading, coincident, and lagging economic indicators. Horizontal dashes near the bottom illustrate recessions. Source: ECRI

The bad news: the ECRI leading indicator has never been this low for this long without hitting recession. This data leads the economy by 6 or so months.

The good news: the weekly leading indicator's negative trend hit it's nadir at the end of March and has been ticking up since.

All in all, the three bundles of data show that we're only just now about to start the recessionary vicious cycle (when the blue line starts heading negative, then the contraction forces have pervaded across the economy - the April 2008 number sits at -0.1%). If the leading indicators climb positive quickly then the pain will be short lived.

So despite a few pundits this week implying we might actually skirt a recession, don't bank on it. The data shows that the next couple of quarters are going to be rough. By the way, you can now follow this data for yourself for free at the ECRI website. I've been paying for the data for years, but it's now open to the public. Just go to BusinessCycle.com, and select the "Recession Watch" menu.