ECRI Weekly Leading Index - Recovery Should Start Soon

I am far from an economist, thank goodness, but with all the worry during the past week about the economic recovery coming unglued, I wanted to inject some facts (gasp!) into the conversation. Twice before in Cabot Wealth Advisory I’ve touched on the lone economic indicator I follow regularly–the Economic Cycle Research Institute’s (ECRI) Weekly Leading Index.

In brief, ECRI has a good track record of economic forecasting, and I like the group because they approach their task much as I approach mine–by using tools that have actually worked in the past. In ECRI’s case, they looked at decades of past recessions and recoveries, found the handful of economic data points that lead the cycle (i.e., they turn up or turn down months before the economy does, with few false signals), and combined them into one index … the Weekly Leading Index.

Anyhow, they offer a press release every Friday that states the Index’s movement and, more important, its growth rate. When the growth rate runs above zero, it’s a sign of expansion; below zero, contraction. And anything over, say, +10% signifies a very strong economic advance upcoming.

When I first wrote about the Index near the end of last year, it was forecasting the worst recession since the 1930s … pretty good call. And even as late as this March, it really hadn’t turned up in any major way. During the worst of the recession, the Index’s growth rate nearly fell to a stunning minus 30%; compare that to a worst-case minus 20% during the awful 1974 recession. And you know the result–600,000 job losses a month and two quarters in a row of GDP shrinkage of more than 6%. Yuck.

But all that is in the past. As of last Friday, the Weekly Leading Index itself had risen sharply in recent months (including a streak of nine up weeks in a row, the first time that’s happened in 20 years) and its growth rate now stands at plus 4%, the first positive reading in two years.

To quote Lakshman Achuthan, ECRI’s managing director,

We’ll definitely see the end of this recession this summer. As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts.

My interpretation: The odds are very much in favor of a recovery–possibly a powerful one–starting in the weeks ahead.

In the real world, then, you should keep your head up. I’ve talked to many of my friends who are understandably worried about their jobs and their companies; many have recently gone through another round of layoffs. But it’s very likely that worry is unfounded, and that the next big move by most employers will be to hire (even if that takes a few months, which is possible).

Now, don’t misunderstand me–I’m not saying you should use the Weekly Leading Index to make judgments about the stock market; the stock market and the economy are two separate animals. I just wanted to pull out the factually based ECRI Index to debunk all the talk that’s popped up in recent days that our economic recovery is toast. It’s not. No one’s saying it’s going to be 1999 all over again, but better times are almost certainly on the way.

Comments

[Roger Knights:]

Asparagus alert! The ECRI may have a good record dealing with ordinary recessions, but this time it's different--more like the 1929 depression--because of the mountain of debt (from an asset bubble) that will hinder any recovery attempt.

Jul 12 01:01 PM

[Mad Hedge F...:]

The stock market says otherwise. see www.madhedgefundtrader... ), it shows that we are going to spend the rest of our summer probing for the bottom right hand shoulder in a screamingly obvious “head and shoulders” pattern. It gives a range of possible bottoms from 850 all the way down to 666 by the end of August. The chart fits my own fundamental scenario like a hand in Michael Jackson’s glove (see “The Worm Has Finally Turned” at www.madhedgefundtrader... ). Soaring unemployment, terrible earnings reports, collapsing commodity prices, a catatonic consumer, real estate of every flavor in free fall, and tidal waves of government spending are not what bull markets are made of. Did I mention the weather is terrible? Every feeble, half hearted, low volume rally we saw this week pushed us closer to the edge of the cliff. The charts of every stock and commodity market in the world, rolling over in lockstep like a thirties Busby Berkeley musical, gives you all the smoking gun confirmation you need. Hold on to those shorts as if your life depended on it.

Jul 12 02:38 PM

[conceptwizard:]

The latest Treasury auction of $19 billion of 10-year notes was at a yield of 3.365%. The bid to cover was 3.28 to 1, the highest ever. This was the third of four sales this week totaling $73 billion.

Consumer credit fell $3.23 billion in May, as credit fell 1.5% to $2.5196 trillion from $2.522 trillion in April. Four monthly declines matches June-December of 1991. Big loans fell $400 million, or 0.3%. Revolving credit fell $2.9 billion, or at a 3.7% rate.

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.

Using historical examples for his paper, New Evidence on the Interest Rate Effects of Budget Deficits and Debt, Mr Laubach came to the conclusion that “a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points, a typical estimate is about 25 basis points”.

The US deficit has blown out from 3pc to 13.5pc in the past year but long-term rates are largely unchanged. Assuming Mr Laubach’s “typical estimate”, long-term rates have to climb 2.5 percentage points

You see, the real problems are just beginning. We are talking about a critical junction for our nation. These people should be worried about their jobs. It is correct to read some green shoots as only 700 billion can hope to do, but unfortunately that is not the root of the problem.

Jul 12 07:05 PM