ECRI Recession Watch: New Update
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) is at 131.3, up slightly from last week's 131.0 (revised from 130.9). The WLI annualized growth indicator (WLIg) rose to 6.6% from 6.4% last week (revised from 6.3%).
Last year ECRI switched focus to their version of the Big Four Economic Indicators that I routinely track. But when those failed last summer to "roll over" collectively (as ECRI claimed was happening), the company published a new set of indicators to support their recession call in a commentary entitled The U.S. Business Cycle in the Context of the Yo-Yo Years (PDF format).
Two weeks ago the company took a new approach to its recession call in its most recent publicly available commentary on the ECRI website: What Wealth Effect?
A Broken Transmission
Despite surging prices for homes and equities, consumer spending is contracting, registering its biggest monthly decline since September 2009. Quite simply, the wealth effect is rendered moot by languishing incomes.
No wonder yoy U.S. import growth has also plunged into negative territory. In recent decades, this has happened only during U.S. recessions. Notably, unlike data for GDP and jobs, imports data are not revised substantially, long after the fact.
Some are surprised that inflation has failed to take off despite massive amounts of quantitative easing. The explanation is simple: recession kills inflation.
The commentary includes a brief discussion of the latest Personal Consumption Expenditure (PCE) deflator, which I've discussed in more detail here. It also includes an illustration of the shrinkage in US imports since the post-recession peak nearly three years ago.
|The bottom line: for all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009.|
ECRI posts its proprietary indicators on a one-week delayed basis to the general public, but last year the company switched its focus to a version of the Big Four Economic Indicators I've been tracking for the past year. In recent months, however, those indicators have slipped below the fold, replaced by the mixed bag of whatever Indicator du Jour might look recessionary, as in the "Yo-Yo Years" commentary linked above. Likewise, see this March 7th Bloomberg video. At about the 2-minute point Achuthan reasserts his call that a recession began in the middle of 2012. In previous interviews he has specifically mentioned July as the business cycle peak, thus putting us in the 11th month of a recession.
Here is a chart of ECRI's data that illustrates why the company's published proprietary indicator has little credibility as a recession indicator. It's the smoothed year-over-year percent change since 2000 of their weekly leading index. I've highlighted the 2011 date of ECRI's recession call and the hypothetical July business cycle peak, which the company claims was the start of a recession.
Here are two significant developments since ECRI's public recession call on September 30, 2011:
- The S&P 500 is up 40.2%.
- The unemployment rate has dropped from 9.0% to 7.6%.
Ultimately my opinion remains unchanged: The ECRI's credibility depends on major downward revisions to the key economic indicators -- especially the July annual revisions to GDP -- that will be sufficient to validate their early recession call. Of course, the July revisions will be quite controversial this year, with some major accounting changes and revisions in annual GDP back to 1929 (more here). So if we don't get the downward revisions to support ECRI, they can always question the accounting changes in the revision process.
For alternatives to ECRI's recession forecasting, see method developed by Anton and Georg Vrba:
See also Dwaine Van Vuuren's latest RecessionALERT indicator snapshot:
Appendix: A Closer Look at the ECRI Index
Despite the increasing irrelevance of the ECRI's recession indicators in recent years, let's check them out. The first chart below shows the history of the Weekly Leading Index and highlights its current level.
For a better understanding of the relationship of the WLI level to recessions, the next chart shows the data series in terms of the percent off the previous peak. In other words, a new weekly high registers at 100%, with subsequent declines plotted accordingly.
As the chart above illustrates, only once has a recession occurred without the index level achieving a new high -- the two recessions, commonly referred to as a "double-dip," in the early 1980s. Our current level is 11.9% off the most recent high, which was set over five years ago in June 2007. We're now tied with the previously longest stretch between highs, which was from February 1973 to April 1978. But the index level rose steadily from the trough at the end of the 1973-1975 recession to reach its new high in 1978. The pattern in ECRI's indictor is quite different, and this has no doubt been a key factor in their business cycle analysis.
The WLIg Metric
The best known of ECRI's indexes is their growth calculation on the WLI. For a close look at this index in recent months, here's a snapshot of the data since 2000.
Now let's step back and examine the complete series available to the public, which dates from 1967. ECRI's WLIg metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
The History of ECRI's Latest Recession Call
ECRI's weekly leading index has become a major focus and source of controversy ever since September 30, 2011, when ECRI publicly announced that the U.S. is tipping into a recession, a call the Institute had announced to its private clients on September 21st. Here is an excerpt from the announcement:
Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there's nothing that policy makers can do to head it off.
ECRI's recession call isn't based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down — before the Arab Spring and Japanese earthquake — to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not "soft landings." (Read the report here.)
Year-over-Year Growth in the WLI
Triggered by another ECRI commentary, Why Our Recession Call Stands, I now include a snapshot of the year-over-year growth of the WLI rather than ECRI's previously favored method of calculating the WLIg series from the underlying WLI (see the endnote below). Specifically the chart immediately below is the year-over-year change in the 4-week moving average of the WLI. The red dots highlight the YoY value for the month when recessions began.
The WLI YoY is 7.2%, the highest level since June 2010. This is higher than at the onset of all recessions in the chart timeframe. The second half of the early 1980s double dip, which was to some extent an engineered recession to break the back of inflation, is a conspicuous outlier in this series, and it started at a lower WLI YoY of 4.1%.
Additional Sources for Recession Forecasts
Dwaine van Vuuren, CEO of RecessionAlert.com, and his collaborators, including Georg Vrba and Franz Lischka, have developed a powerful recession forecasting methodology that shows promise of making forecasts with fewer false positives, which I take to include excessively long lead times, such as ECRI's September 2011 recession call.
Here is today's update of Georg Vrba's analysis, which is explained in more detail in this article.
Earlier Video Chronology of ECRI's Recession Call
- September 30, 2011: Recession Is "Inescapable" (link)
- September 30, 2011: Tipping into a New Recession (link)
- February 24, 2012: GDP Data Signals U.S. Recession (link)
- May 9, 2012: Renewed U.S. Recession Call (link)
- July 10, 2012: "We're in Recession Already" (link)
- September 13, 2012: "U.S. Economy Is in a Recession" (link)
Note: How to Calculate the Growth series from the Weekly Leading Index
ECRI's weekly Excel spreadsheet includes the WLI and the Growth series, but the latter is a series of values without the underlying calculations. After a collaborative effort by Franz Lischka, Georg Vrba, Dwaine van Vuuren and Kishor Bhatia to model the calculation, Georg discovered the actual formula in a 1999 article published by Anirvan Banerji, the Chief Research Officer at ECRI: The three Ps: simple tools for monitoring economic cycles - pronounced, pervasive and persistent economic indicators.
Here is the formula:
"MA1" = 4 week moving average of the WLI
"MA2" = moving average of MA1 over the preceding 52 weeks
WLIg = [m*(MA1/MA2)^n] – m