ECRI's Bold Recession Call: Even Expert Forecasts Can't Be Trusted

by: Dorsey Wright Money Management

Back in September, the Economic Cycle Research Institute (ECRI) announced publicly that the US was headed into a recession. Advisor Perspectives carried the article:

Today the ECRI publicly announced that the U.S. is tipping into a recession.

Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.

ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down — before the Arab Spring and Japanese earthquake — to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.”

The graphic attached looked very convincing.

Click to enlarge

Bold Recession Call - Source: ECRI, Advisor Perspectives

Now that we have the additional perspective afforded by time in mid-November, a couple of things are apparent.

1) It’s possible we won’t have a recession at all. The Leading Economic Index has continued to rise and, if anything, the economy has appeared to accelerate slightly.

2) Even if we are still on a path to a recession, markets have not responded in a way that would be expected. For example, since September 30 the best performing domestic sectors have been energy, basic materials, industrials, and consumer discretionary stocks—exactly what you would expect for an economy in expansionary mode. The worst performing sectors have been telecom, healthcare, utilities, and consumer staples—exactly what should do well in a recessionary environment.

Source: Dorsey Wright Money Management

I’m not trying to pick on ECRI here. They know far more about economic forecasting than I ever will. In fact, they’ve probably forgotten more than I ever learned. ECRI is clearly credible or no one would pay attention to their forecast in the first place—they’ve had many successful forecasts in the past and they’ve earned their credibility.

I’m just trying to draw attention to how difficult the forecasting game is. ECRI has access to good data and trained economists with a lot of experience, something that a retail investor will not be able to recreate—and they still make mistakes. For the typical investor, using relative strength in a systematic way is likely to be a more fruitful approach to investment than relying on even an expert forecast.