ECRI's Weekly Leading Index At 20-Week Low

Jun. 3.12 | 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). For the week, WLI made a 20-week low while the four-week moving average of its growth rate fell to a 10-week low.

For the week ending May 25, 2012:

  • WLI fell to 122.4, down from the prior week's reading of 123.0.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth fell to negative 0.6%, down from last week's reading of positive 0.1%.
  • 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 (click to enlarge images):

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Annual WLI growth: A year ago, on May 27, 2011, WLI stood at 128.8, so its growth rate is negative 5.0% on an annualized basis.

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This chart shows ECRI's reported WLI growth rate that is derived from a four-week moving average.

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

In a May 11 article, "Rising GDP Doesn't Rule Out Recession," ECRI explained some of why they think revisions to GDP could show we are already in a recession:

Four of the past six recessions started during a quarter when GDP was growing, as did 72% of all recessions in the past 94 years.... expansions end -- and recessions begin -- at the peak of the business cycle, after which the economy begins to contract....

It took more than a year to learn that GDP actually shrank by 1.3% during the first quarter of the 2001 recession. But back then, it was initially reported as having grown at 2.0%. That's not very different from the latest reading for GDP growth in the first quarter of 2012: 2.2%.

In August 2008 - just before the Lehman collapse - GDP was reported to have risen in the first and second quarters with the latter revised up sharply, triggering over a 200-point rally in the Dow that day. Today we know that GDP actually shrank in the first quarter while the second has been revised down by two full percentage points.

In the end, even if we don't see two successive down quarters of GDP, which is commonly believed to define a recession, that doesn't mean we've skirted one. That's only a rough rule of thumb, not an actual recession definition. In fact, two of the last 8 recessions did not contain two straight quarters of negative GDP.

That article seems to answer comments many of their critics posted on some of my earlier Seeking Alpha articles.

Does SPY Lead WLI or Does WLI Lead SPY?

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. But this is not always the case. Specifically, in the lead-up to the last two recessions, the WLI turned down months before the stock market did. Is WLI predicting lower prices for SPY in the weeks ahead?

Chart of S&P 500 Vs. ECRI's WLIClick to enlarge

Despite a slowing economy, I like equities for a portion of your portfolio including SPY and the more diverse Total Stock Market Index exchange traded fund, VTI. Over the next 10 years, I expect the S&P 500 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.


  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 (Charts and more info) is the exchange traded fund for the S&P 500 Index.
  5. VTI (Charts and more info) is Vanguard's "Total Stock Market" exchange traded fund.
  6. VOO (Charts and more info) is Vanguard's NEW exchange traded fund that tracks the "S&P 500 Index." It is a lower cost alternative to SPY. I own and write about SPY as I have many years of data for it but VOO could do SLIGHTLY better than SPY over time due to having a lower expense ratio.

Disclosure: I own SPY and the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts.