By Doug Short
The Published Record
The published ECRI WLI growth metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recessio1981-1982) by nine weeks. The WLI did turned negative 17 times when no recession followed, but 14 of those declines were only slightly negative (-0.1 to -2.4) and most of them reversed after relatively brief periods.
Three other three negatives were deeper declines. The Crash of 1987 took the Index negative for 68 weeks with a trough of -6.8. The Financial Crisis of 1998, which included the collapse of Long Term Capital Management, took the Index negative for 23 weeks with a trough of -4.5.
The third significant negative came near the bottom of the bear market of 2000-2002, about nine months after the brief recession of 2001. At the time, the WLI seemed to be signaling a double-dip recession, but the economy and market accelerated in tandem in the spring of 2003, and a recession was avoided.
The Latest WLI Decline
The question had been whether the WLI decline that began the the Q4 of 2009 was a leading indicator of a recession. The published index has never dropped to the -11.0 level in July 2010 without the onset of a recession. The deepest decline without a recession onset was in the Crash of 1987, when the index slipped to -6.8. The ECRI managing director correctly predicted that we would avoid a double dip. The latest GDP for Q4 of 2010 confirms the ECRI stance.
The WLI Versus Other Macroeconomic Indicators
For additional perspective on the performance of this indicator, see Comparing the ECRI Weekly Leading Index with Two Key Competitors, which highlights the curious behavor of the WLI following the 2008 Financial Crisis.
The ECRI Weekly Leading Index appears to be more sensitive to upturns than either the Philly Fed's ADS Business Conditions Index (ADS) or the Chicago Fed's Current Activity Index.