The Great Leading Indicator Smackdown: New Update
The Conference Board versus ECRI
Periodically I update a series of overlays comparing the ECRI Weekly Leading Index (WLI) and the Conference Board's monthly updates of its index of Leading Economic Indicators (LEI). The most recent LEI update was published on December 22 (data through November), and today we have the latest WLI, based on data through December 30th. As we will see in the charts below, the two indicators continue to exhibit a major divergence.
Let's start with a look at the complete LEI series from the early days, when the index was reported by the Department of Commerce through its reincarnation in 1995 as a product of the Conference Board. I've also highlighted recessions as identified by the NBER.
A cursory glance reveals that the downward slope before recessions begins many months before recession starts, but the upturns coincide closely with the ends of recessions. Let's chart the data a different way to illustrate more precisely the lead time for this index in forecasting recessions. The next chart uses a simple Excel formula to plot months that set new highs at 100% and the other months by the percent of decline from the previous high.
The LEI has indeed begun declining in advance of all eight of the official recessions since its inception in 1959 — by the substantial average of 10.5 months and the wide range of 5 to 18 months. In contrast, the upturns coincide with the ends of recessions, often leading by a month or two.
ECRI Weekly Leading Index
Let's now compare ECRI's Weekly Leading Index with the Conference Board's LEI. I routinely follow ECRI's WLI Growth Index rather than the WLI. But for a comparison with the LEI, we'll focus on the WLI itself.
Downturns in the WLI also precede the onsets of recessions, and a percent-off-highs chart will document the degree of lead more precisely.
The callouts in the chart, of course, are in weeks rather than months, but the recession lead times for this index are, like the LEI, quite long, and the upturns are highly coincident with recession ends.
The key "difference maker" between Conference Board and ECRI is the Growth Index of the latter. The next chart features the WLI with the WLI Growth Index plotted below.
Here is a chart that zeros out the positive Growth Index data points in order to make a comparison with the two off-peak charts above. As we readily see, the Growth Index lead time before recessions shrinks considerably.
The one late call was the second part of the double-dip recession in the early 1980s. This was essentially a Fed engineered recession, an inevitable byproduct of Chairman Volcker's strategy to end stagflation by raising the Fed Funds Rate above 20%. It is a business-cycle anomaly that shows up as a late call in this chart and as a recession without an intervening new-high in the two percent-off-high charts above.
The Great Indicator Divergence
Throughout much of their history the ECRI WLI and Conference Board LEI have exhibited a reasonable degree of correlation, although the Growth Index, which ECRI mysteriously calculates from its WLI, has, in my view, given ECRI a distinct edge in making recession calls (see my note below for why I say "mysteriously"). The next chart is an overlay of the two. I've used a log y-axis to give precision to the slopes and vertical distances in the respective trends.
Note, however, that since the spring of 2010, the two indicators have exhibited a rather dramatic divergence. Beginning in November 2009, six months after the end of the last recession, the Conference Board's LEI index has set a new all-time high every single month — 25 and counting — with only two exceptions, June 2010 and April 2011. Their latest (LEI press release) includes an optimistic forecast: "The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring."
In contrast, as the adjacent chart illustrates, ECRI's WLI has trended down in two distinct waves since the end of April 2010. In the summer of 2010 ECRI's co-founder, Lakshman Achuthan, denied that the first wave down in the Growth Index was signaling an imminent recession. However, in late September 2011, Achuthan announced, dramatically and categorically, that the US was tipping into recession, and that "there's nothing that policy makers can do to head it off."
What we have here is the Ultimate Indicator Smackdown — starkly conflicting views from two of the most widely followed centers of economic research on the fundamental question: "Where is the economy headed?"
I will post updates on how this divergence plays out over the months ahead, so we can all serve as referees to this smackdown.
- I called ECRI's growth index calculation "mysterious" because the Excel spreadsheet that ECRI shares with the public provides the historical data for both the WLI Level and the Growth Index — the latter presumably calculated from the former. However, the Growth Index in the spreadsheet consists of real numbers with 15 significant digits (the maximum supported in Excel), not a formula (e.g., the current week divided by a fixed previous interval week minus one). I've experimented with a variety of formulas to replicate the Growth series from the Level data — with no success.
- The Conference Board has announced that the LEI is undergoing a major overhaul, the first since 1996, with the publication of its next release on on January 26th. Revisions will reach back to 1990. For more details, see this Bloomberg news item.