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... and sold hot dogs. He was hard of hearing, so he had no radio. He had trouble with his eyes, so he had no newspaper. But, he sold really good hot dogs. He put up a sign on the highway telling how good they were. He stood by the side of the road and cried, "Buy a hot dog, mister." And people bought. He increased his meat and bun orders and he bought a bigger stove to take care of his trade. He got his son home from college to help him. But then something happened. His son said, "Father, haven’t you been listening to the radio? There’s a big depression on. The international situation is terrible and the domestic situation is even worse."Whereupon the father thought, "Well, my son has been to college. He listens to the radio and reads the papers, so he ought to know." So, the father cut down his bun order, took down his advertising signs, and no longer bothered to stand on the highway to sell hot dogs. His hot dog sales fell almost overnight. "You were right, son," the father said to the boy. “We are certainly in the middle of a great depression.”-- Author Unknown
Depressions, and recessions, are even more difficult to predict than the stock market. Yet, most economists agree the recession ended around this time last year. Currently, the question du jour is whether the economy is going to slip back into recession; aka the dreaded double dip. While there's always the chance of a double dip, they're pretty rare. For example, using industrial production as a “measuring stick,” there have only been three, out of the 38 recessions since 1880, which qualify as double dips. Interestingly, all three of those double dips were characterized by a mild first recession followed by a more severe secondary recession. Plainly, what we experienced in the 2007-2009 recession was anything but mild. Accordingly, I continue to think the odds of another recession are low. There is the risk, however, that like "the man who lived by the side of the road,” we talk ourselves into a recession.At present, while the economy has hit a “soft spot,” the odds of sliding into a recession are indeed low. To this point, Credit Suisse constructed a Six-Month Recession Probability Model that puts the odds at zero, as can be seen in the nearby chart. Said model is comprised of:1. Real Fed Funds Rate (level)2. S&P 500 (six-month percent change)3. Private Non-Farm Payroll Growth (six-month percent change)4. Single-Family Housing Permits (six-month percent change)5. University of Michigan Consumer Expectations Index (six-month percent change)6. Initial Jobless Claims (year-over-year percent change)7. “TED” Spread (spread between three-month LIBOR and three-month T-bill yields)8. Relative Price of Energy (deviation from trend)Dating back to 1964, the model has registered only one false signal, which occurred in 1984 and is likely attributable to the Continental Illinois banking crisis. As the model’s title suggests, the average lead time from when a signal is registered and a recession begins has been 5.7 months. To reiterate, the model indicates there's zero probability of another recession. Yet, over the past few months, the stock market has been transfixed by the possibility of a “double dip".
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