« Prosperity on the plains? Ya sure, you betcha! | Main | Core inflation lower than expected--but how much does rounding matter? »
August 31, 2006
Midwest economy still expanding, but is the rest of the country slipping into recession?
Apropos of my last post which lauded the midwest economy, we have a new data point from the NAPM-Chicago business barometer. Via Reuters:
NEW YORK (Reuters) - Growth in business activity in the U.S. Midwest slowed slightly in August, a report showed on Thursday, but the data may signal the economy is in recession.
The National Association of Purchasing Management-Chicago business barometer slipped to 57.1 from 57.9 in July, for a 40th straight month of growth. Economists' median forecast had put the index at 57.0. A reading above 50 indicates expansion.
However, according to Kingsbury International, a partner of NAPM Chicago, which puts out The National Association of Purchasing Management-Chicago business barometer, "the U.S. economy could be in a recession at this time."
...
Although the NAPM Chicago index has shown expansion for 40 consecutive months, with an average reading of about 59, in the past three months the reading has been below that average.
"In four of the last five recessions, the slowing of the Chicago business barometer signaled a recession either one or two years later," Kingsbury International said in a report.
Let us first take note that 40 months of expansion with an average reading of 59 is a pretty good run. But I would hesitate to say that slipping to 57.1 might be an indication that we are already in a recession. In fact, if you look at the entire series, you will see several instances where the indicator his touched 50 without recession--most notably 1985, 1995-96, and 1998. Kingsbury International is saying that in four out of the last five recessions were preceded by decreases in the series. But there are at least 4 (depending on how long or large a decrease you want) cases where a decrease in the series produced no recession. The power of this test (probability of rejecting the null when it is false) is not good.
The economy is slowing, and we may be on the cusp of a recession--perhaps still with the opportunity for a soft landing. However, if a recession has already begun with the Chicago business barometer at 57 it would be the first time since 1973 that something like that has happened. I don't think that's likely.
Posted by William Polley at August 31, 2006 10:50 AM
Trackback Pings
TrackBack URL for this entry:
http://www.williampolley.com/cgi-bin/mt-tb.cgi/580