Geoffrey Moore, who was ECRI’s founder, was the dating committee of the NBER until 1979.  He used to joke that he had lunch with himself to date the business cycles.  In 1979, they made a true committee and Geoffrey was the senior person on that committee until he passed away in 2000.

ECRI continues to monitor the dating of business cycles, and we agree with the dates the NBER has picked through the December 2007 peak.  We verified it, and it is an accurate date based on a classic definition, which includes GDP growth and jobs supplemented by sales and income, with equal weighting of growth and jobs.

There is a real risk going forward that there will be a shift in the dating committee of the NBER to one that places less weight on employment.  It’s not something that is necessarily related to current events.  People obviously have different backgrounds in terms of their knowledge.  When I look at the committee, it is shifting more toward a model-based approach that puts heavier weight on production than employment.

I don’t know that it will happen.  We will keep a close eye on it. We are very alert to this issue.

I couldn’t agree more.  The classic definition of a recession was established in the 1920s by Geoffrey Moore’s mentor, Wesley Mitchell.  That definition has withstood the test of time, through a lot of structural change, including wars and financial crises. That definition has been very good.

If you notice, the December 2007 peak in the business cycle coincided with the end of jobs growth.  That classic definition is very sensitive to what people, not businesses, experience.  If there is a drift from that emphasis, we will see it.

Let’s deal first with the objective data.  We have a future inflation gauge (FIG), which has as its only purpose to turn ahead of a cyclical turn in the inflation cycle.  The FIG has risen to a one-year high, and – to put this in context – this was after falling to a 50-year low.

We’re not trying to tell a story and find data to fit it. This is what the index is telling us: deflation is off the table for the time being.  Underlying inflationary pressures have begun to simmer.  We do not yet see a surge in inflation.  When you look at measures like the CPI, where there was actually negative growth, it has turned up and is threatening to go a little bit positive.  That is consistent with earlier moves in the FIG.

For the moment, you could say that we are in a temporary sweet spot. But the problem is the cycle keeps moving.  It becomes very important where the FIG goes from here.  Does it start to ramp up and gain and accelerate to the upside?  If so, then you have your answer as to what is the bigger risk.  Our forecast is cyclical – for the next couple of quarters.  I cannot tell you two years from now whether inflation or deflation is the bigger risk.

This is the dilemma the Fed faces.  If, either by their actions or for some other reason, we have a new recession in relatively short order – let’s say in 2011, for which we have no forecast – then deflation could emerge. That kind of bunching, with more frequent recessions, starts to allow deflation to gain traction. 

On the other hand, if the Fed says it is not worried about inflation at all and will leave interest rates low for an extended per of time, or even if it does that without saying so, then you increase the risk that the FIG will surge up.

I find it difficult to figure out what the Fed is going to do, and I think even the Fed doesn’t know what it will do.  Therefore, it’s okay admitting that we don’t know what will happen in 2011 or 2012, which lets us follow our cyclical indicators.

In terms of clear and present dangers, these leading indicators can tell you if the time is now.  So far, the very literal near-term reading is that we have a recovery.  It is not going to falter in the next few quarters, deflation is off the table, and we don’t have surging inflation in terms of consumer prices. 

For the time being, that’s not a bad position to be in.