The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) rose for the fifth consecutive week, now at 123.7 from last week's 123.5 (revised from 123.6). See the WLI chart below. The WLI growth indicator (WLIg) is in its second week in expansion territory at 1.0 (up from last week's 0.5). It has now posted ten consecutive weeks of improvement.
As of today, the ECRI website still features Lakshman Achuthan's July 10th Bloomberg TV interview, in which he reaffirmed his company's recession call and stated that we're already in a recession (link to video) Now that we're a mere two weeks from the anniversary of the September 21, 2011 recession call, I expect Mr. Achuthan to make another round on the video circuit.
A cornerstone of his argument is that four key indicators used by the NBER to make official recession calls are, as he put it, "rolling over." Here are the four indicators in question. Only one, real retail sales (which is the most volatile of the lot) had been showing intermittent signs contraction but subsequently improved in the July data. There is no question that the recovery from the Great Recession has been frustratingly slow, but the overall trend has been one of improvement. The next of the Big Four, and the first for August data, was the Nonfarm Employment in this morning's employment report.
Here is one of my Big Four charts with ECRI's recession call annotated.
Of course, the recent months for these data series are subject to revision. But at this point, economic data have consistently contradicted Achuthan's "rolling over" assertion and claim that we're now in a recession, a position that is rapidly becoming an embarrassment.
Today ECRI published a note defending its position based on their expectation of downward revisions to coincident indicators. See Recession Evidence Obscured in Real Time. That is indeed often the case. But let's check out one of the latest such revision, BEA's revision to Disposable Personal Income in July:
This revision produced a significantly stronger trend since late 2011. But time will tell whether we will see the major downward revisions that would be needed to trigger an NBER recession call in the timeframe of ECRI's prediction.
For more background on these four economic indicators, see the following articles:
The Big Four Economic Indicators: What They're Telling Us about a Recession
The NBER Co-incident Recession Model: "Confirmation of Last Resort"
A Closer Look at the ECRI Index
Let's take a moment to look at the Weekly Leading Index. The first chart below shows the index level.
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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 of the previous peak. In other words, a new weekly high registers at 100%, with subsequent declines plotted accordingly.
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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 14.1% 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. It is the recent behavior of this indicator that most clearly suggests that ECRI has painted itself into a corner with its unequivocal recession call.
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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.
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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 30th of last year, 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.
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As the chart above makes clear, the WLI YoY is currently at a lower level than at the starting month for five of the seven recessions during the published series. The latest weekly reading, -0.2% (-0.18 to two decimals), is up from last week's -1.46%. The behavior of this indicator over the next quarter or so will be especially interesting to watch.
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 (barring a future NBER announcement of a Q1 2012 recession start).
Here is their latest snapshot of the WLI growth variants, which should be studied in the context of the analysis at the Shadow Weekly Leading Index Project.
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Here is today's update of Georg Vrba's analysis, which is explained in more detail in this article.
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Additional Analysis on Recession Forecasting
Here are some links to some useful articles for evaluating the substance of the ECRI's controversial recession call, including work by Dwaine and others:
July 10: Recession is Not Imminent
June 26: Recession or No Recession: Is ECRI's Weekly Leading Index Still Relevant?
April 17: The Unemployment Rate: A Coincident Recession Indicator
May 2: Can the US Skirt a Global Recession?
March 6: ECRI's Recession Call: "Is There Something Magic About 2 Percent?" Georg Vrba digs into ECRI's claims about the year-over-year growth rate of its indicators.
March 3: The Elusive 2012 Recession: When Can We Expect It? Georg Vrba and Dwaine van Vuuren introduce the RecessionAlert.com website.
February 21: Evaluating Popular Recession Indicators Georg Vrba offers a critique of three recession indicators, including ECRI's WLI and WLIg.
February 17: No Wonder ECRI's Weekly Leading Index Data is Free Kishor Bhatia points out the remarkable similarity between the WLI and the S&P 500.
February 14: Recession: Just How Much Warning is Useful Anyway? Dwaine van Vuuren questions the benefit of recession forecasts for portfolio management.
January 18: Why the Average Investor Is Bamboozled by Recession Forecasts by Jeff Miller.
January 17: Further Improving the Use of the ECRI WLI by Dwaine van Vuuren and Georg Vrba)
January 10: Using the ECRI WLI to Flag Recessions by Dwaine van Vuuren
January 3: US Recession - An Opposing View by Dwaine van Vuuren.
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
"n"= 52/26.5
"m"= 100
WLIg = [m*(MA1/MA2)^n] – m
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