Investment

Tuesday, July 21, 2009

Recession in U.S. May Have Ended, Leading Index Shows


Source: By Carlos Torres (Bloomberg)

July 20 (Bloomberg) -- Components of the index of leading economic indicators are signaling the worst U.S. recession in five decades may be over now, not three to six months from now.

Less-known elements of the Conference Board’s report, including ratios and diffusion indexes, bolster the view the contraction has ended. The leading index, a gauge of the economic outlook over the next two quarters, rose 0.7 percent in June, a third consecutive gain, the New York-based research group said today.

“The process of coming out of the recession, although still fragile, may be starting,” Ataman Ozyildirim, a Conference Board economist that tracks the business cycle, said in an interview. “If it continues in this way, the NBER committee will look back and tell us the recession ended.”

A committee of the National Bureau of Economic Research, a private group in Cambridge, Massachusetts, is the accepted arbiter of when recessions begin and end. The group announced in July 2003 that the last recession had ended in November 2001, indicating their deliberations take time.

Several requirements within the Conference Board’s report that economists say need to be fulfilled before a contraction is officially considered over were checked off the list in June.

Those were: three straight gains in the ratio of coincident-to-lagging indicators, three months of 50-plus readings in the diffusion index, three consecutive gains in the leading index and an annualized reading over that period in excess of 10 percent.

Annual Rate

The leading index was up 12.8 percent at an annual rate over the last three months, today’s report showed. It was the best performance since January 2002, two months after the last recession ended.

“This is the third straight month of a gain in leaders and suggests that, along with other economic evidence, the U.S. recession might have ended” in the second quarter, Kenneth Kim, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey, wrote in a note to clients.

The Conference Board’s index of coincident indicators, a gauge of current economic activity, dropped 0.2 percent after decreasing 0.3 percent the prior month. The NBER cycle-dating committee follows this index to help time downturns. The gauge tracks payrolls, incomes, sales and production.

Increases in the coincident index would provide confirmation that the recession has ended, said Ozyildirim.

The diffusion index shows the breadth of gains in the leading index, with figures over 50 showing the majority of components rising. The index registered a reading of 70 in June for a third consecutive month, today’s report showed.

Financial Gauges

Earlier this year, only the financial components of the leading index -- including money supply and the difference in interest rates between the benchmark 10-year Treasury note and the overnight rate banks charge to borrow from each other --were rising. The increase in the diffusion index shows other measures are also now increasing.

“We now have positive moves in the indicators of the real side of the economy,” such as decreasing jobless claims and increasing building permits, the Conference Board’s Ozyildirim said.

While the timeframe can vary between three and nine months, on average the leading index reaches a bottom about five to seven months before the end of a recession, Ozyildirim said.

“The ‘all clear’ is not quite there, but you are beginning to see the kind of sequence unfolding that will get us there,” he said, referring to the end of the recession.

No comments:

Post a Comment