by Calculated Risk on 1/11/2008 01:07:00 PM

Click on graph for larger image.

This graph shows the year-over-year contraction in the S&P 500 Index (based on monthly data).

This was suggested by Northern Trust's Director of Economic Research Dr. Paul Kasriel as a coincident indicator of a recession.

Back in December, Kasriel put the odds of a recession at 65.5%: Probing the Probabilities of a 2008 Recession. In the piece, Kasriel noted:

"There’s an old joke that the behavior of the stock market has predicted 17 out of the past 10 recessions. Chart 4, which contains year-over-year percent changes of monthly average observations of the S&P 500 stock index, shows that year-over-year declines in this stock market index are a necessary condition for a recession, but not a sufficient condition. That is, every recession starting with the one in 1948 has been accompanied by a year-over-year decline in the S&P 500 index".

This is chart 4 from the Kasriel piece.

"However, there also have been occasions when the S&P 500 index declined on a year-over-year basis without a recession occurring. Starting in July 2003, the year-over-year change in the S&P 500 index has been positive. So, there is no recession in sight despite the signal being sent by the KRWI and the likely peaking of industrial production, right? Don’t pop the champagne corks yet. As of Thursday, December 20, the S&P 500 was up only 2.95% versus year-ago (Chart 5). The S&P 500 index finished 2006 at 1418.30. So, with the S&P 500 closing at 1460.12 on Thursday, December 20, we are not far from a year-over-year contraction in the index."

Now we are there.