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

For the week ending April 20, 2012:

  • WLI increased to 124.1, up 0.3 from the prior week's reading of 123.8.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth fell to a positive 0.6%, down from last week's reading of 1.2%.
  • The lowest reading for WLI growth on record was -29.9% on Dec. 5, 2008. It turned higher months before the stock market [S&P 500 (NYSEARCA:SPY)] bottomed on March 6, 2009, at 666.79.
  • Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.

WLI growth: Although lower, this marks the 5th week of positive WLI growth. A year prior, on April 22, 2011, WLI stood at 129.8, so its growth rate is negative 4.4% on an annualized basis.

Today we learned that real gross domestic product, the output of goods and services produced by labor and property located in the United States, increased at an annual rate of 2.2% in the first quarter of 2012 (that is, from the fourth quarter to the first quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. (Press Release)

Click to enlarge all images.

On March 15 in an article "Why ECRI Stands By Their Recession Call", ECRI explained why it remains bearish on the US economy and continues to predict a recession.

On Friday, April 6, I asked Lakshman Achuthan, ECRI's co-founder and chief operating officer, about the latest data on the U.S. Economy -- specifically, positive WLI growth matching a three-month upturn in the Ceridian-UCLA Pulse of Commerce Index. Achuthan said year-over-year (YoY) growth of WLI has barely improved from its lows and remains "solidly in negative territory." In addition:

please note that PCI growth (YoY) is still -2.2%, and even quarter-over-quarter is -4.9%.

With YoY growth in all the coincident indicators (GDP, industrial production, personal income and sales) all staying in cyclical downturns and YoY payroll job growth, which had been the only holdout, now rolling over -- as we had predicted a few weeks ago -- it's pretty clear that for now U.S. Economic growth is worsening, not improving.

GDP, WLI and Deficit Spending

As my graph above shows, GDP turned lower as you would expect with the lower WLI readings, but it remains firmly in positive territory. The US economy has not entered a recession but it is painfully low.

Actual GDP in Q1-2012 was $15.462 trillion compared to $14.868 trillion in Q1-2011. The difference is $594 billion, less than the current 6 month deficit of $779 billion I show in the second chart in the Seeking Alpha article "U.S. Borrows 53.7 Cents Of Every Dollar Spent In March." Clearly, we would be in a recession that ECRI predicted if not for deficit spending.

Looking Ahead

Since ECRI releases 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 S&P 500 or its exchange traded fund, SPY. Notably, in the lead-up to the last two recessions, the WLI turned down months before the stock market did.

Chart Of S&P 500 Vs. ECRI's WLI

Click to enlarge.

The markets fell for two weeks and WLI fell those same two weeks. This week all three major markets (DOW, S&P500 and the NASDAQ) are up over the prior week ending April 20, 2012.


With the markets currently all up again over last week, will WLI move higher again next week reflecting this move by the markets?

Notes:

  1. Occasionally the WLI level and growth rate can move in different directions because the latter is derived from a four-week moving average.
  2. 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).
  3. For a better understanding of ECRI's indicators, read its book, "Beating the Business Cycle."
  4. DIA is the exchange traded fund for the DJIA
  5. SPY is the exchange traded fund for the S&P 500 Index.
  6. QQQ is the exchange traded fund for the NASDAQ 100 index.
Source: ECRI's WLI Moves Higher; Q1 GDP Positive Due To Deficit Spending