ECRI's Weekly Leading Index Falls Again; Economy to Slow Further in Coming Months

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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) Friday.

For the week ending May 27, 2011:

  • WLI is 128.3 down from the prior week's reading of 128.4. This reading marks a four month low dating to the week ending January 21, 2011, when it stood at 127.7.
  • The lowest reading for WLI on record was 105.3 for the week ending March 6, 2009.
  • WLI growth at 4.9% is down from last week's reading of 5.0%
  • The lowest reading for WLI growth on record was -29.9% on December 5, 2008. It turned higher months before the stock market [S&P500 (NYSEARCA:SPY)] bottomed on March 6, 2009, at 666.79.

Regarding this data release, ECRI's Co-Founder & Chief Operations Officer, Lakshman Achuthan said: "With WLI growth declining for six weeks from its mid-April peak, following the January peak in ECRI’s U.S. Long Leading Index, economic growth is set to slow in coming months."

Chart of WLI and WLI growth vs GDP Growth - (click charts to expand)



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&P500 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&P500 vs ECRI's WLI
Note that the chart above of the S&P500 vs. WLI shows a breakout above the dashed blue line that represents the neckline for a "Head and Shoulders Bottom" pattern. This is a very bullish pattern. A pullback to this neckline during a global slowdown projected by ECRI would not invalidate the bullishness of this pattern.

I believe some of my early cyclical stocks have already pulled back and offer attractive prices when they hit my targets to purchase before WLI turns up again.

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 ten, 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."

Disclosure: I am long SPY.