A new study conducted by MIT’s Sloan School of Business and Boston's State Street Associates used a scientific approach that predicts a 70% chance of an economic recession in the next six months.
By James DiGeorgia,
A newly developed study by the researchers at MIT’s Sloan School of Business and Boston's State Street Associates deserves the attention of economists, investors and professional money managers because of the startling results after being backtested over the last 100 years.
The MIT and State Street researchers applied the economic data from four factors to the principles of the Mahalanobis distance, a measurement tool designed to analyse human skulls that was developed in 1936. The researchers created an index combining industrial production, non-farm payrolls, stock market return and the slope of the yield curve i.e., the interest rates of bonds having equal credit quality but differing maturity dates. Then they applied this formula to economic conditions as far back as 1916.
The researchers discovered the index, called the KKT Index, appears to be a reliable indicator of approaching recessions. The backtesting showed that when this index rises above 70%, the likelihood of an economic recession occurred within six months. The KKT index hit 76% three months ago, in November of 2019.
The methodology was published last week as "A New Index of the Business Cycle," by William Kinlaw, Mark Kritzman and David Turkington.
While other economic indicators are pointing to a strong U.S. economy through 2020, the combination of weakening industrial production and the slope of the yield curve unsettling, according to William Kinlaw, the KKT index is signaling a 76% chance of a recession is approaching. By comparison, the chances of a recession occurring in any six months, without the four conditions used in the KKT index works out to be just 17%.
As a backdrop to this study, some economic realities may indicate a recession is approaching beyond those used in the KKT index…
- Economic growth last year in the Eurozone was the lowest it's been in six years, mainly hampered by slowdowns in France and Italy, according to the European Commission. In its latest report, the commission said 2019 eurozone growth was 1.2% and barely grew at all in the final three months. Third-quarter growth was 0.3 percent.
- U.S. farm bankruptcies rose 20% in 2019 despite federal aid.
- The growth rate of real US GDP is predicted to be 2.3% in 2019 and 1.9% this year.
- Damage to the global economy by the Coronavirus is still at best hazy. The uncertainty is being caused by concerns that China is STILL under-reporting the number of those infected, the death toll. Richard Haass who has been the President of the Council on Foreign Relations since July 2003, before which he was Director of Policy Planning for the United States Department of State and a close advisor to Secretary of State Colin Powell said today during an interview on Morning Joe that the number of infections and deaths could be reported by a multiple of 5 or 10 times based on his experience with working with the Chinese.