ECRI's WLI Vs. Conference Board's LEI

by: John Helzer

Many commentators have pointed out the divergence of the Economic Cycle Research Institute's public WLI index vs. the Conference Board's Leading Economic Indicator. Curiosity got the better of me, so I plotted the two along with the US GDP and the S&P 500 for the last 12 years. Since, the public data available on the Conference Board's website only went back to April 2002, I had to start there for the LEI. I used a smoothing technique that I got from the Conference Boards website which was: sum of the last 6 month's LEI x 2 = number.


One important point: I took the monthly LEI data from each individual press release on the Conference Board's website archives. This avoids the semiannual or annual adjustments. Whenever possible I took the LEI data from the 3 months old data on the press release, to allow for the short term fine tuning similar to what ECRI does for their data. For example, the November 18th release below which pulled August data from this release, along with October and September.

The Conference Board Leading Economic Index® ((NYSEMKT:LEI)) for the US increased 0.9 percent in October to 117.4 (2004 = 100), following a 0.1 percent increase in September, and a 0.3 percent increase in August.

The "down" arrows represent the timing of public ECRI's recession calls. The smaller arrows are the "warnings". The larger arrows are the "for sure" calls.

Click to enlarge

As you can see, both WLI and the LEI predicted the 2008-2009 recession, but it appears to me the WLI had a lead over the LEI. According to the Conference Board , a recession usually follows when the (annualized) six-month decline in the LEI reaches 4.0–4.5 percent and the six-month diffusion index falls below 50.0 percent.

In the summer of this year the indicators have diverged with WLI dropping much faster than the LEI with the Conference Board's LEI calling for continued growth.

Note: ECRI always states that they have other Long Lead Indicators that they use that are not public. So in my opinion, it's best to wait for their pronouncements pointing towards a recession.

From each organizations respective Websites:

9/30/2011 - "Early last week, ECRI notified clients that the US Economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off."

11/18/2011 - "Says Ataman Ozyildirim, economist at The Conference Board: “The October rebound of the LEI — largely due to the sharp pick-up in housing permits — suggests that the risk of an economic downturn has receded. Improving consumer expectations, stock markets, and labor market indicators also contributed to this month’s gain in the LEI as did the continuing positive contributions from the interest rate spread."

Which index will be right? I am not 100% sure, but I am extremely wary right now about a probable recession and it's effect on the market. Fill in what ever reason you wish: Europe, US Debt, Revised Down 3Q GDP Congressional Super Committee, Semiconductor Revenue/Earning Forecasts, China slowing slightly, ECRI's track record, etc.

It is as others have stated correctly: "A real time test of competing Leading Economic Indices is currently being played out before our Eyes."

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SPY, QQQ over the next 72 hours.

Additional disclosure: Currently 100% Cash Position.