Likely recession in 2012

I hate to admit it, but it is more likely than not that the U.S. will see a recession of some sort in 2012. How long or deep or when it will start are completely unknown, but it is more likely than not that we will see a significant economic decline of four months or longer between now and the end of next year. The Economic Cycle Research Institute (ECRI) has already issued their call and said back at the end of September that the U.S. economy is "tipping into recession" and they are about as good as it gets when it comes to forecasting economic turning points.

 

Sure, it doesn't currently feel like we are in a recession (unless you are one of the unemployed or underemployed or in their families or looking for a job) right now, but so-called "coincident" (current) indicators such as GDP and employment are not reliable indicators of what is coming or even what is right around the corner.

 

Personally, I think we have enough momentum to coast through the rest of the year, but I can't say with confidence that we won't see layoffs in December that would signal the start of a recession as happened in December 2007. I don't think that is likely next month, but it is possible. And January and February are a whole other story.

 

One of the big wildcards is cuts in government spending at both the federal and state and local levels. The actions or inactions of the congressional deficit super-committee could quickly propagate to government contractors and vendors and take us over the tipping point, or not. It remains to be seen, but is clearly a major risk. Federal cuts would be mostly further out but set a tone for businesses and impact their current hiring and state and local cuts may accelerate or decelerate in the coming months, so we have wildcards in the wildcards.

 

Retailers have been signaling stronger hiring for the holidays, but we don't know how solidly holiday spending will trend, and then these seasonal employees will be let go, reversing these job gains in a relatively weak economy.

 

To be more specific, I feel that there is a 40% to 70% chance of recession in 2012. That still leaves plenty of room for us to squeak by without a formal recession, but it does mean that recession is more likely than not.

 

Even if there is a recession, my expectation is that it will be relatively short and shallow. Maybe only four to six months long and maybe only a modest decline in GDP and employment. If it does happen, it will likely start in December through March and end in the June to September timeframe. Sure, things could be worse, but I don't see that as likely at this stage.

 

If the recession does turn out to be short or expected to be short, the financial markets could look beyond the end of the recession, since typically markets are looking out nine months or so into the future. And maybe that is exactly what the stock market was looking at back in May through July, a recession nine months later in the winter of 2012. And maybe the start of the market bounce last month is the market signaling an economic recovery in July.

 

Timing the market is always tricky business. Some people will try to do it anyway and maybe success but likely fail. And even if you get one leg right, say the start of a decline, will you get the other leg right as well? How many people correctly pegged the March 2009 market low and reentered the market at that time or within a month or even two? So, for me, since I expect any recession to be minimal, I'll just continue to maintain as "steady as she goes" course and stay in the market. I'll make my annual retirement contributions somewhere in January through April depending on when I get my taxes done.

-- Jack Krupansky