The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) is at 132.9, down from 133.6 last week (a revision from 133.8). The WLI annualized growth indicator (WLIg) at one decimal place rose to 2.3 from last week's 2.1 (a revision from 2.3).
ECRI has been at the center of a prolonged controversy since publicizing its recession call on September 30, 2011. The company had made the announcement to its private clients on September 21st. ECRI's cofounder and spokesman, Lakshman Achuthan, subsequently forecast that the recession would begin in Q1 2012, or Q2 at the latest. He later identified mid-2012 as the start of the recession. Over the past two years he has been a frequent guest on the likes of CNBC and Bloomberg TV, where he has adamantly maintained the company's position.
ECRI's Latest Public Commentary
The latest publicly available commentary on the company's website is the March 14th Price Signals of Global Slack. The text includes this key observation:
|In fact, year-over-year growth in world trade prices remains in a cyclical downturn, and dropped deeper into negative territory, hitting an eight-month low in December. Indeed, this measure has exhibited almost continuous price deflation since early 2012, barring a couple of abortive forays into positive territory.|
The referenced chart (at right) shows the rather dramatic absence of growth in this metric over the past two plus years. The US can grow exports only by cutting prices. The commentary arrives at this conclusion: "Thus, the mounting deflation in world trade prices is signaling growing slack in the global economy."
The ECRI Indicator Year-over-Year
Here is a chart of ECRI's data that illustrates why the company's published proprietary indicator has lost 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 original recession call and the hypothetical July 2012 business cycle peak, which the company previously claimed was the start of a recession. I've update the chart to include the "epicenter" (Achuthan's terminology) of the hypothetical recession. pushed forward by three months from the original start.
As for the disconnect between the stock market and the mid-2012 recession start date, Achuthan has repeatedly pointed out that the market can rise during recessions. See for example the 2:05 minute point in the November 4th video. The next chart gives us a visualization of the S&P 500 during the nine recessions since the S&P 500 was initiated in 1957. I've included a dotted line to show how the index has performed since ERIC's original July 2012 recession start date (now adjusted forward by three months).
Here are some notable developments since ECRI's public recession call on September 30, 2011, now well beyond its second anniversary:
- The S&P 500 is up 60.4% at yesterday's close and set a new intraday record high today.
- The unemployment rate has dropped from 9.0% to 6.7%.
- Although Q4 GDP was revised downward to 2.4%, it remains above its 10-year moving average of 1.7%.
Why ECRI's Recession Forecast Was a Blunder
ECRI's recession forecast was doomed from the very day (September 21, 2011) that company alerted its private clients. On that same day the Fed announced Operation Twist, which was shortly thereafter followed by QE3.
Eventually we will have another recession. But the aggressive monetary policy of the Fed almost certainly dodged the recession bullet in ECRI's timeframe, regardless of the asset bubbles it may have created in doing so.
What's left of ECRI's credibility depends on major downward revisions to the key economic indicators. The July 2013 annual revisions to GDP weren't adequate to substantiate ECRI's position. On the other hand, I would point out that a standard data manipulation of Real GDP, the rear-view mirror on the economy that popular thought associates with recession calls, underscores current economic weakness -- or to put it more euphemistically, "slow growth". I'm referring to the year-over-year GDP percent change (the chart below). The latest GDP update (through the Q3 Third Estimate) shows the current data point is lower than at the onset of nine of the eleven recessions since the inception of quarterly GDP.
We get a similarly weak picture in the YoY Real Final Sales (which excludes changes in private inventories). Here are two snapshots of this quarterly indicator: The complete series since 1948 and a per-capita version since 1960 (the start date of the Census Bureau's mid-month population estimates):
Given the weak growth of real disposable personal incomes per capita, the lethargy of Real Final Sales comes as no surprise.
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 ended 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 still off the most recent high, which was set back in June of 2007. We've exceeded 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 now at 2.4%, which is higher than the onset of six of the seven recessions in the chart timeframe, although well off its 7.5% interim high set in mid-June. 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 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