On October 29, economist Lakshman Achuthan, the managing director of the ECRI, gave assurances on CNBC that "we're not going to go into a new recession anytime soon."
The Published Record
The published ECRI WLI growth metric has had a respectable (but by no means perfect) record for forecasting recessions. The following chart shows the correlation between the WLI, GDP and recessions.
[Click all to enlarge.]
A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recession (1981-1982) by nine weeks. The WLI did turn 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 of the false 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 false negative came near the bottom of the bear market of 2000-02, 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 latest WLI decline that began Q4 of 2009 was a leading indicator of a recession or a false negative. The published index has never dropped to the current level without the onset of a recession. The deepest decline without a near-term recession was in the Crash of 1987, when the index slipped to -6.8. The ECRI managing director is now on record as saying that we've avoided a double dip. The revised GDP for Q3, coming in at 2.6, confirms the ECRI stance.
The WLI Versus Other Macroeconomic Indicators
For additional perspective on the performance of this indicator, see this previous post, which highlights the curious behavior of the WLI following the 2008 Financial Crisis.