Letter to the Editor
The following is in response to John Hussman’s commentary, Enter, the Blindside Recession , which appeared on June 25:
Predictions will always turn out to be correct – the question is when?
Again we are warned that a recession is imminent, as evidenced by the following statement in Hussman’s commentary: “The joint evidence suggests that the U.S. economy has entered a recession that will later be marked as having started here and now.”
This warning is no different from the one he issued last year on August 8, 2011 (Recession Warning, and the Proper Response): “The economic evidence now suggests that the U.S. and the global economy are again entering recession.”
Accordingly, one can infer from these statements that Hussman believed that there was a 100% chance of a recession occurring shortly after August last year and that he believes the same now. This time he presented a chart of a recession indicator without a recession trigger line. Presumably, the most recent level, or the August 2011 level of this indicator are the level when this indicator signals recession.
Below is a chart of my own composite recession indicator (the red graph) with Hussman’s “Extracted Signal” (the blue graph) superimposed. The similarity of the graphs is obvious – not surprising, since both are leading indicators. Note the false positive signals in November 2002 and August 2011, when Hussman’s indicator signaled recession when none occurred.
My methodology differs from Hussman’s, in that I provide a quantitative estimate of recession probability for my indicator. (See my recent article: Likelihood Ratios and their use in Recession Indicators
The current level of my indicator (9.63) suggests that there is a 50% probability that the economy is in recession, and a 63% chance that a recession could begin within the next three months. When my indicator reaches a level of zero (the recession trigger line), the probabilities increase to 75% and 85%, respectively.