What Are the Chances of a Recession?

06/26/2013 8:30 am EST

Focus: MARKETS

James Stack

President, Stack Financial Management

Some leading economists are already forecasting a recession, but Investech's Jim Stack examines the evidence and comes to a different conclusion.

Is the R word coming back? We're talking now to Jim Stack here at MoneyShow.com. Jim, you'd think in a current bull market there wouldn't be any talk of recession. Is there?

Well, we've certainly seen some forecast of recession. One of the most widely followed economic forecasting firms is forecasting a recession, and if you look at fourthquarter GDP growth last year, it dropped under one-half of a percentage point—that's just a little bit from turning negative—and corporate earnings have leveled off.

Fortunately, I don't think a recession is in the cards for this year. In fact, I think what we're in is a mid-cycle slowdown. We've seen some of the macroeconomic evidence soften. The ISM survey for the manufacturing sector has dropped to 50. Anything below 50 would be contraction in the economy, or a recession. Fortunately, the same survey for the service sector is staying at a strong level.

So what we're going through right now is this slowdown that has brought down commodity prices. It's certainly brought down the inflation expectations with the price of gold, and I think it's set the stage for what may turn into one of the more extended economic recoveries of the past 50 years.

You are the ultimate technician. You're an engineer by trade, your background, but some might wonder the more you talk about a recession, the more you could will it into happening.

Well, recessions really are backdated by economists. That's something we have to keep in mind. Recessions are only identified in 20/20 hindsight. In fact, most recessions, by the time they're recognized, they're just about over.

The better warning flag for a recession is the stock market and those warning flags that warn of a market top. Those show up in the divergences. They show up in the bellwether stocks. And the other area to watch is macroeconomic evidence.

Watch consumer confidence. The consumer today accounts for two-thirds of GDP growth. Consumer confidence is in a steady uptrend. It's still weak by historical standards, but it is gradually rising. As long as consumer confidence, reported by the Conference Board and University of Michigan every month...as long as that confidence is continuing to edge upward through 2013, the chances of recession are going to remain slim.

Now, the bull market right now is heading toward a fourth-year anniversary. What is the average length of most good runs in our country?

Actually, we are in our fifth year. The economic recovery is heading toward its fifth anniversary because of course the recession ended after the bull market started back in 2009. But if you look at fifth years in economic recoveries, it's a pretty scattered outcome in terms of historical perspective.

Bull markets generally don't last beyond five years. Economic recoveries generally don't last beyond five years, but the common characteristic between those that did last beyond five years is an easing in those inflation pressures, a slowdown in economic growth, and the kind of corrections that we've seen in this bull market that has really kept investors nervous to that extent. We don't have the universal expectations or optimism that typically accompany the major market tops.

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