ECRI's WLI Ticks Lower, But WLI Growth Rate Continues Higher

Dec. 3.10 | About: SPDR S&P (SPY)

The Economic Cycle Research Institute (ECRI), a New York-based independent forecasting group, released its latest readings for its proprietary Weekly Leading Index (WLI) this morning (more about ECRI).

For the week ending Nov. 26, 2010:

  • WLI is 125.4 down from the prior week's revised lower reading of 126.0. (Last week we reported WLI was 126.4.)
  • The lowest reading for WLI this year was 120.4 for the week ending July 16.
  • Since apparently bottoming at -10.3 for the week of Aug. 27, WLI growth moved higher or was flat for the 13th consecutive week to minus 2.4% from minus 3.3% a week ago.
  • The last positive reading for WLI growth was for the week ending May 28, 2010, when it stood at positive 0.1%.
Last week on Nov. 30 we reported in "ECRI Calls for Revival of U.S. Economic Growth" that ECRI said "with a lot of conviction, that there is a revival in growth right ahead of us." If you have read their book, Beating the Business Cycle, you know the WLI indicators must be persistent, pronounced and pervasive before ECRI will call for a turn in the U.S. economy.
You can clearly see the persistent and pronounced turn in WLI and its growth rate in this chart below. Now that ECRI made its call for a turn in the business cycle, we know that the improving economic data is persuasive too.
Today's jobs report is disappointing because the 39,000 new jobs created in November are fewer than needed to absorb new workers, so the unemployment rate went higher. The good news is it was a positive number. If you add the upward revisions of 38,000 more jobs to the September and October numbers, then 72,000 more jobs were created than reported last month.
Chart of WLI and WLI growth vs GDP Growth
Click to enlarge

Since ECRI releases its WLI numbers for the prior week and the stock market is known in real time, you can sometimes get a clue for next week's WLI from the weekly change in the stock market. Notably, in the lead-up to the last two recessions, the WLI turned down months before the stock market did.
Chart of S&P500 vs. ECRI's WLI
Click to enlarge

I want to point out that a correction in the stock market now would not necessarily change ECRI's call for an economic growth rate revival. It takes a "pervasive" (for the majority) change of direction of its indicators in a "pronounced and persistent" way for ECRI to call for a turn in the economic cycle. These indicators and the trigger levels are proprietary. I have found no one who has duplicated them or ECRI's success in calling business cycle turns based on their reading of their indicators.
Note that the chart above of the S&P500 vs. WLI shows a breakout above the dashed green line that represents the neckline for a "Head and Shoulders Bottom" pattern. This is a very bullish development. A correction to test the pattern from above with a bounce to a higher high would be even more bullish, but not necessary for a continued market advance.
Chart of WLI from 1973 to 2010
Click to enlarge

Chart courtesy of ECRI
  1. The WLI for the week ending 12/3/10 will be released on 12/10/10
  2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
  3. ECRI uses the WLI level and WLI growth rate to help predict turns in the business cycle and growth rate cycle respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. Based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below negative 10, but no recessions resulted (although there were clear growth slowdowns).

Disclosure: I am long the exchange traded fund for the S&P500, (NYSEARCA:SPY) in my personal account and in the "Explore Portfolio" in "Kirk Lindstrom's Investment Letter."