ECRI: Economic Recovery Not on the Horizon

According to the U.S. Weekly Leading Index (US WLI) released on 01/16/09 published by Economic Cycle Research Institute (ECRI), the economy still remains near the low point in the cycle. Lakshman Achuthan of ECRI states:

Despite some recent stabilization, the WLI remains in a clear cyclical downswing, indicating that an economic recovery is not on the horizon.

The US WLI has a slight lead over business cycles.

As a leading indicator, the WLI is forecasting economic conditions approximately six months in the future.

Disclosure: none

Comments

[CautiousInvestor]

This reinforces the view that the economy could be in the red for all of 2009 with obvious implications for investors.

2009 Jan 18 09:07 AM

[sleepless_on_wall_street]

Mr. Hansen, you recently made a comment that you felt the NBER could have called the start of the recession in 3Q/2008 (rather than December, 2007). Since WLI was already negative in January, 2008, I wonder how this indicator relates to the start of a recession. Can you comment on this?

2009 Jan 18 11:12 AM

[jgonion]

Reader Beware:

It's important not to read too much into the ERCI indexes for the purposes of investing. These so-called "leading" indexes do in fact lead the indexes that are believed to be "coincident" with changes in economic activity. However, the leading indexes typically lag stock market activity, making them of dubious predictive value for investment purposes.

Readers can explore this relationship by downloading the ERCI data from:

www.businesscycle.com/.../

... and comparing it to weekly S&P quotes from:

finance.yahoo.com/q/hp...

2009 Jan 18 12:19 PM

[Steven Hansen]

thank you all for commenting:

sleepless on the wall:

this is my exact comment i made on seekingalpha.com/artic...:

"i have a problem with the initial marker of 4Q 2007 for this event. NBER, if they had stayed true to its fundamentals used to mark past recessions - would have selected 3Q 2008."

NBER had used a two consecutive quarters of economic contraction rule to mark a recession. in the case of the current recession marker of 4Q 2007, many of those indicators were still positive at that time. there was also an economic recovery in 2Q2008 that the NBER ignored.

Specifically, NBER has now redefined recessions:
"recession—the way we use the word—is a period of diminishing activity rather than diminished activity."

Because their methodology of marking a recession has now changed, comparisons of time frames and events of past recessions needs to be carefully scrutinized.

Concerning NBER vs ECRI: take for example the 2001 / 2002 recession. note that ECRI's WLI was showing negative business fundamentals over a year earlier than NBER marked the recession. you can have negative business fundamentals and still not have a recession. Also, the WLI leading indicator (not coincident) so you need to time shift the curve approximately six months anyway.

jgonion:

you are 100% correct that this index does not predict market performance, nor is its purpose to predict market performance. economists do not run the equities markets. the markets do what the markets do. they have their own dynamics.

this indicator is meant for business so that they can prepare for future conditions. a well run company could have prepared for this downturn and remained relatively profitable.

this is just one more indicator you can use to decide on your investing strategy. I know of no indicator which foretells equity market performance. it was one of the indicators i used to get out of dodge before this puppy crashed.

as this is a leading indicator of business cycles, i would personally use this index as one of my tools to confirm whether a market rally was based on a solid future earnings outlook.

steven hansen

2009 Jan 19 12:37 AM