ECRI's Recession Call: ''Is There Something Magic About 2 Percent?''

March 6th, 2012

by Georg Vrba

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The question in the title above was raised by Mike "Mish" Shedlock in his article The Disingenuous ECRI Recession Call.

Is there any reason to believe that when the ECRI's U.S. Coincident Index year-over-year growth rate (which I will designate as USCIyoy) dropped below 2% a recession always follows, as ECRI's Lakshman Achuthan has recently been at pains to expound.

My recession indicator evaluation system described in Evaluating Popular Recession Indicators does not support this contention. My recession indicator evaluation system gives the "USCIyoy minus 2.00%" a recession capturing score of minus 4.771, which is one of the poorest scores of the many indicators which I have evaluated. Optimizing for the best trigger, I found, that if the trigger setting was moved from 2.00% to 1.465%, then this indicator would get a better, but still very poor score of minus 2.492.

So arbitrarily setting the trigger at 2% without optimizing for best recession capturing is rather disingenuous. It would therefore be more appropriate to use a trigger setting of 1.50% to signal oncoming recessions, but then this indicator would not signal a recession now. The two charts below illustrate this.

To sum up, the USCIyoy is an inferior indicator. Is this really all that ECRI has left in their arsenal?

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