The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) slipped again in Friday's update. It is now at 129.1 versus the previous week's 129.7 (revised from 129.6). See the WLI chart in the Appendix below. The WLI annualized growth indicator (WLIg) also eased, now at 7.6, down from last week's 8.4 (revised from 8.3). WLIg has been in expansion territory since mid-August of last year, but is has been trending lower the past two weeks.
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 several months. See, for example, this November 29th Bloomberg video that ECRI continues to feature on its website -- twelve weeks later -- along with the now clearly false assertion that "Indicators used to determine official U.S. recession dates have been falling since mid-year." Achuthan pinpoints July as the business cycle peak, thus putting us in the eighth month of a recession.
Here is a chart of ECRI's data that severely undermines the company's recession call -- the smoothed year-over-year percent change since 2000 of their proprietary 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.
Many of us who closely follow ECRI news saw links to the painfully funny YouTube parody of ECRI's recession call with spokesman Lakshman Achuthan portrayed as a doomed Hitler. The parody was achieved by adding clever (R-rated) captions to a scene from the 2004 film Downfall.
ECRI's Recession Call: A Bet Against the Fed
ECRI adamantly denied that the sharp decline of their indicators in 2010 marked the beginning of a recession. But in 2011, when their proprietary indicators were at levels higher than 2010, they made their recession call with stunning confidence bordering on arrogance:
Ironically enough, on the same day ECRI forecast a recession, Chairman Bernanke announced a a new policy, Operation Twist, which was followed by QE3 in September 2012 and unlimited easing (aka QE4) in December 2012.
Essentially ECRI claim that "there's nothing that policy makers can do to head it [a recession] off" was a bet against the Fed.
For a few months after ECRI's recession call, their proprietary indicators cooperated with their forecast, but that has not been the case since the second half of 2012 -- hence their switch to the traditional Big Four recession indicators. ECRI's December 7th article, The Tell-Tale Chart, makes clear their public focus on the Big Four.
The Big Four
The Big Four Indicators that I track continue to show a slowly recovering US economy. The latest of the Four, Real Retail Sales, was released since my last ECRI update. The preliminary data for January shows a weak month-over-month gain of 0.1% following two months of 0.5% gains. The expiration of the 2% FICA tax holiday is no doubt hurting sales, and delayed tax refunds for early filers has also been suggested as an additional factor.
ECRI believers will probably get a boost on March 1st when the next of the Big Four updates is released -- Real Income Less Transfer Payments. As I've pointed out previously, the dramatic increase in this indicator in November and December (the red line in the chart below) has given an overly positive skew that will be reversed when the January numbers are released. Those increases were the result of widespread shifting of early 2013 income into 2012 as a pre-Fiscal Cliff tax strategy. For an illustration of the impact of this year-end tax planning strategy in the past, see this YoY Personal Income chart and note the two pairs of tax-planning callouts in the 1990s.
My Personal View...
The Fiscal Cliff is behind us and the Debt Ceiling showdown has been pushed out. The Big Four Economic Indicators continue to show expansion, now including the lagging Real Manufacturing and Trade Sales report (which will also be updated on March 1st with data through December). Here is a snapshot of ECRI's version of the Big Four Economic Indicators.
However, despite my rejection of ECRI's recession call, I continue to believe the US economy remains at vulnerable. However wrong ECRI might have been, recession risk remains. The greatest endogenous threat to the US economy is the ongoing impact of the expired 2% FICA tax holiday, the decline in early 2013 personal income as a result of 2012 year-end maneuvers and the increasing likelihood that sequestration will become a reality.
The Advance Estimate for Q4 GDP at minus 0.1 percent bears watching. Of course, the Second and Third Estimates could adjust it higher. Certainly the upbeat report earlier this month on our Trade Balance strengthens the likelihood that the 2nd Estimate of Q4 GDP will be revised to a positive number.
The Usual Caveat: The recent economic data are subject to revision, so we must view these numbers accordingly. Nevertheless, I continue to think that an ECRI retraction of their recession call is long overdue.
Appendix: A Closer Look at the ECRI Index
Despite the apparent increasing irrelevance of the ECRI indicators, 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 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:
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.
As the chart above makes clear, the WLI YoY, now at 5.3%, has slipped from the 5.7%-5.8% level of the previous four weeks. This is higher than at the onset of all seven recessions in the chart timeframe. The closest to the current level was 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, starting with a WLI YoY at 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