Towards Financial Freedom
US: Nowcasting & Recession Signaling
- Incoming source data, while uneven, has been incrementally illuminating the growth composition of 3q12 real GDP. Our calculations suggest consumer spending improving modestly at an annual rate of 1.8% and residential investment possibly rising by almost 15%. Conversely, we anticipate business fixed investment to slow further, probably contracting by more than 1%, and net exports to shave around three-tenths of a percentage point off growth. And the contribution from government might be almost flat to marginally positive in 3q12. The sum of the preceding categories suggests that real final demand (GDP excluding inventories) could be hovering at less than 1.5% in 3q12, slower than the 1.7% pace in the prior quarter.
- But our tracking on private inventories--including the recent data on manufacturing and despite our 'somewhat larger' assumption surrounding farm inventory liquidation this quarter--implies a more aggressive pace of inventory building in 3q12. Accordingly, we estimate that private inventory accumulation might contribute decently to 3q12 growth, perhaps by as much as 0.5%-point; however, the sizable near-term contribution could weigh on 4q12 prospects. Overall, the foregoing information is still consistent with our prevailing 3q12 baseline forecast of 1.8% real GDP growth. While we maintain our 4q12 growth forecast of 1.9% at this time, the risks might be skewed to the downside in light of the hefty inventory build assumption in 3q12. For the full-year 2012, we now expect real GDP growth to average 2.1%, a tad lower than our prior outlook of 2.2%. Our average 2013 growth outlook, however, remains unchanged at 2.0% at this time.
- For alternative nowcasting perspectives, we also scrutinize our collection of timely macro indicators. Specifically, we harness our proprietary High-Frequency Activity Tracker (or HAT, which takes into account most weekly and daily indicators) and our employment-driven model (ED model) for additional confirmation and clues. Our updated HAT guidance, which has improved
in recent weeks, currently implies 3q12 real GDP growth of marginally above 2%. Similarly, our employment-driven model--given the details from the latest labor market report--implies 3q12 real GDP growth in the vicinity of 2%. All else equal, the foregoing guidance seems to tilt the risk to our 3q12 baseline GDP forecast of 1.8% slightly to the upside.
- Still, in view of the modest growth backdrop, it is prudent to monitor recession risks closely. For this task, we rely on our proprietary Recession Alert Composite (RAC), an experimental weighted diffusion composite index of three financial-oriented
and two activity-related indicators of business cycle peaks. Our calculations indicate that the RAC, while still hovering below the recent high of 60% in Jul 2012, has been wiggling between 45% and 50% from Aug through early Oct 2012 (the early Oct
reading is preliminary). More importantly, the current RAC reading remains below its alert threshold of 70% at this time. Optically, a RAC reading of 70% or higher has been historically consistent with the last 11 recession episodes.
Source: OSK
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