Monday, October 3, 2011

Warren Buffett: New recession unlikely

Billionaire investor Warren Buffett thinks the likelihood of a new recession is low:
Warren Buffett says Berkshire Hathaway has been buying stocks at bargain prices, including shares of his own company. ...

The Omaha billionaire isn't worried his new purchases will be caught up in a 'double-dip' for the U.S. economy. He thinks "it's very, very unlikely we'll go back into a recession... We're coming out of a recession."
I agree with him. I track eight specific leading indicators on the St. Louis Federal Reserve website. Of the eight, five are in positive territory, one is negative, and two are borderline. (For most of these indicators, I find the year-over-year percentage change to be a better leading indicator than the current level.)

Positive
  • Initial jobless claims (YoY)
  • Interest rate spread between 3-month and 10-year Treasuries
  • Manufacturer's new orders of capital and durable goods (YoY)
  • Money supply growth (YoY)
  • New housing permits (YoY)

Negative
  • St. Louis & Kansas City financial stress indices

Borderline
  • ISM Manufacturing Index
  • S&P 500 (YoY)

The two borderline indicators have a history of producing lots of false positives. As the saying goes, "The stock market has predicted nine of the past five recessions." The financial stress indices are probably negative because of what's happening in Europe, rather than because of what's happening here.

This graph shows the Leading Index for the United States through August. Notice that while it normally dips during or prior to recessions, there is no dip this time.

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