Today, we finally received official word from the National Bureau of Economic Research (NBER) that the recession ended in June 2009. And while that’s good news, informed investors are probably wondering, “Where have they been?” One of the reasons that the NBER is notoriously late in classifying expansions and contractions is that they use coincident measures of economic activity to mark these important events. More specifically, they focus on industrial production, employment, real manufacturing and trade sales, and personal income less transfer payments. These data points are relevant and important, but they gauge activity that is happening now, not activity that should occur in the future.
Since markets anticipate and discount future events, trying to position off of what is happening now is fruitless since it’s effectively like looking through the rearview mirror. This is why we focus on leading indicators in attempting to forecast future economic and financial market direction. Many of these leading indicators were foreshadowing an economic turning point as early as the second quarter of 2009 and we thought they clearly pointed to the recession being over during the summer of 2009 (you can read our second and third quarter 2009 Market Reviews here).
What’s really ironic is that that it’s taken the NBER so long to determine the end of the recession that leading concerns are now pointing toward a slowdown in our future. Our job is to determine whether the slowdown will be a benign mid-cycle correction or the start of another contraction. The data is still somewhat ambiguous on that front, and we’ve taken a defensive posture until the message is more uniform. Whether or not we get more bullish or bearish is still in question, but one thing is for sure, we can’t wait for the NBER to help us with calling a cycle change. The only thing you can count on from this group is that their call will be really late!