Are We Still in a Recession?

One of the easiest and best indicators of how well the economy is doing is the ISM Purchasing Managers Index.
Here’s a look at the index and you can see how well the dips line up with recessions (the shaded areas):
fredgraph032510.png
The recession periods are determined by the National Bureau of Economic Research. They’ve already determined that the recession started in December 2007, but they haven’t yet given us an ending date.
The ISM Index is useful to follow for a numbers of reasons. First, it comes out at the beginning of the month so it’s timely. Also, the index is scaled so that a number above 50 indicates the economy is expanding while below 50 indicates it’s contracting.
Historically, the NBER committee’s dating has followed the ISM closely. (Here’s NBER’s official statement on what they look at when dating an economic cycle.)
Here’s the historic odds that the economy is in recession for each ISM reading:
ISM……………………….Recession Odds
<40...............................93.9% 40-44............................62.5% 45-49............................22.8% 50-54.............................5.2% 55-59.............................1.7% 60+................................3.5% The real drop-off point is approximately 44.4. Any ISM reading at that or less has come during a recession over 80% of the time. At 44.5 or more, the number is just 8%. So where do we stand today? The ISM didn't fall below 44 until September 2008 so NBER was clearly persuaded the weakening jobs market. By June 2009, the ISM jumped above 45 and it's been above 50 for the last seven straight months. This, of course, doesn't mean it will stay that way. Predicting exactly what NBER will do is hard and odds are never perfect. However, going by the historical record it seems that the recession ended around the middle of last year. This may not be exactly welcome news to the 15 million people who are still unemployed.

Posted by on March 25th, 2010 at 9:52 am


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