Last week we highlighted this chart from Zero Hedge, which shows the leading indicator of the Economic Cycle Research Institute (ECRI) plunging.
Zero Hedge's title was "ECRI Leading Economic Index Drops To 44 Week Low, Predicts Massive Economic Contraction" and the WSJ said it was "Confirming A Sense Of Gloom."
Dash of Insight highlighted a 'stern rebuke' of any recession forecast, from a managing director of ECRI.
Meanwhile, in the comments there was a stern rebuke.
* Lakshman Achuthan wrote:
While we certainly appreciate the attention given to our Weekly Leading Index, I’d like to clarify a few points raised in the article. First, according to the Economist magazine, “the ECRI” has not ever given false alarms on a recession forecast.
The purported false alarms from “the ECRI” mentioned in this article [WSJ article] come from a mistaken and simplistic view that negative growth in ECRI’s Weekly Leading Index (WLI) is tantamount to a recession forecast. In fact, since 1983, cyclical downturns have taken WLI growth under the zero line a dozen times, but recessions have followed on only three of those occasions – times when ECRI actually made a recession forecast.
Since ECRI itself has never used WLI growth going negative as a recession signal, it is important that such “false alarms” are attributed not to ECRI or even to the WLI, but to what is a mistaken interpretation of the WLI.
In fact, at the very least, ECRI itself would need to see a “pronounced, pervasive and persistent” decline in the level of the WLI (not merely negative readings in its growth rate) following a “pronounced, pervasive and persistent” decline in ECRI’s U.S. Long Leading Index (not discussed in the article), before it makes a recession call.
It is pretty obvious that the ECRI does not want anyone misinterpreting their methods to suggest a recession forecast that they do not foresee.
Dash of Insight believes the widespread mis-reading of the ECRI is a sign of the extreme negativity which still persists in the market. Dash reminds us that there are also other examples of similar negative bias, using other forms of economic data or indicators, since many are now losing steam after the recent sharp rebound. At first blush, many growth rates and indicators will be falling.
Thing is, the economy was never expected to keep churning at the speed of the initial 'V-shaped' rebound, and a slow-down was expected towards the second half. Thus the proper read for many (not all) economic indicators right now is as follows, as Dash of Insight explains with a nice example which makes the point obvious:
1. You started with a period of very rapid acceleration. Acceleration is a change in speed, known as a second derivative in calculus. Since most people did not take or do not remember calculus, this simple example is enough.
2. You then reduced speed from 80 to 60. This is rapid deceleration. The second derivative turned sharply negative, even though your speed is still high.
3. In your final "cruise" state you are still making rapid (and legal) progress toward your destination. You certainly have not stopped completely, nor are you moving backwards.
So declining economic velocity can still result in an advancing economy, as long as it doesn't last too long. Obviously, if we lose 20 mph of speed another three times then we'll be at a full stop. Hopefully ECRI will sound the alarm well before that point.
(Tip via Abnormal Returns)
Disclosure: No Positions