ECRI Has Mixed WLI Readings As Economic Growth Worsens

Includes: SPY
by: Kirk Lindstrom

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, WLI was up while its growth rate fell for the third straight week after peaking at 1.7% on April 6.

For the week ending April 27, 2012:

  • WLI increased to 124.7, up 0.7 from the prior week's reading of 124.0.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth fell to a flat 0.0%, down from last week's reading of 0.5%.
  • 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: A year ago, on April 29, 2011, WLI stood at 129.4, so its growth rate is negative 3.6% on an annualized basis.

The economy is headed in the wrong direction as predicted by ECRI. Despite massive deficit spending meant to create jobs, the economic numbers are not encouraging. Job creation was 275,000 in January, 259,000 in February, 154,000 in March, and only 115,000 for April. Making matters worse, the Fed has kept rates artificially low to stimulate the economy while pushing the inflation rate to the upper end of its target.

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 May 4, Lakshman Achuthan, ECRI's co-founder and chief operating officer said:

The median recognition lag after a recession begins is about half a year. After the last recession began, it actually took nine months before the consensus view accepted the reality, especially since we had clearly positive real-time GDP readings for the first half of 2008 that were later revised downward.

When we review the year-over-year growth rate of the US Coincident Indicator Index, which includes broad measures of output, employment, income and sales, we find it to be in a clear, cyclical downturn. That is an authoritative indication that overall US economic growth is actually worsening, not reviving.

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

SPY vs 10-Year Treasury

According to Standard & Poor's, the forward dividend is 2.22% while the 10-year Treasury Note now only pays 1.88%.

Data as of the close of: 5/3/2012
S&P 500 close of: 1391.57
Dividend yield (last 12 months: April, '12) 1.98%
Forward Dividend yield (indicated rate) 2.22%

Despite a slowing economy, I like equities including SPY. Over the next ten years, I expect the S&P500 will keep up with inflation and the dividend it pays should grow with or even exceed inflation. An added benefit to owning equities is their dividends and capital gains currently get favorable tax treatment. Finally, treasury rates are artificially low giving ALL bond funds significant interest rate risk.

Next Week

With the markets down significantly over last week and the worse than expected jobs data, will WLI move lower this week reflecting the new information?

Also, despite artificially low interest rates and a huge "Obama Tax Cut" that exceeded the "Bush Tax Cuts", the economy refuses to grow fast enough to create significant new jobs. Does this validate the ECRI's recession call even if we don't have an official recession?


  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. SPY is the exchange traded fund for the S&P 500 Index.

Disclosure: I am long SPY.