The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) slipped in the latest public data. It is now at 129.7 versus the previous week’s upwardly revised 130.7 (previously 130.6). See the WLI chart in the Appendix below. However, the WLI annualized growth indicator (WLIg) rose, now at 8.3, up from last week’s 7.2. WLIg has been in expansion territory since August 10th of last year, and it is at its highest level since May of 2010.
ECRI posts its proprietary indicators on one-week delayed basis to the general public, but ECRI’s Lakshman Achuthan has switched focus to his company’s version of the Big Four Economic Indicators I’ve been tracking for the past several months. See, for example, this November 29th Bloomberg video that ECRI continues to feature on their website. Achuthan pinpoints July as the business cycle peak, thus putting us in at the beginning of the eighth month of a recession.
Here is a chart that illustrates why ECRI’s weekly indicators have little credibility — The smoothed year-over-year per cent change since 2000 of their proprietary weekly leading index. I’ve highlighted the 2011 date of ECRI’s recession call and the July business cycle peak, which the company claims was the start of a recession.
First a flashback for those of us who have followed ECRI’s media appearances: we know that the company adamantly denied that the sharp decline of their indicators in 2010 marked the beginning of a recession. But in 2011, when their proprietary indicators were at levels higher than 2010, they made their recession call with stunning confidence bordering on arrogance:
Early last week [September 21, 2011], 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….
Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street. (source) For a few months, ECRI’s indicators cooperated with their forecast, but that has not been the case in the second half of 2012 — hence, I surmise, their switch to the traditional Big Four recession indicators. ECRI’s December 7th article, The Tell-Tale Chart, makes clear their public focus on the Big Four.
The Big Four
The Big Four Indicators that I track includes real retail sales based on the same formula as the Federal Reserve economists (see this PDF file for details). By this metric, sales continued to increase until October, the data for which was significantly impacted by Hurricane Sandy, but then bounced back in November and December.
In contrast, ECRI uses Manufacturing and Trade Sales data, which is updated monthly along with the BEA’s Personal Consumption and Expenditures release. However, the numbers lag by one month from the other PCE data. The series is available on the BEA website. See Section 0 – Real Inventories and Sales and look for Table 2BU.
Here is a side-by-side comparison of the two measures of sales showing the per cent off the all-time high.
Here is a closer look at the pair since 2010. I’ve used markers to clarify the monthly changes. Note that the latest Manufacturing data is through November. We won’t have the December numbers until March 1. But the Mfg & Trade surge in November would appear to be another nail in the coffin of the ECRI recession call.
My Personal View…
The Fiscal Cliff is behind us and the Debt Ceiling showdown has been pushed out. The Big Four Economic Indicators continue to show expansion, now including the lagging Real Manufacturing and Trade Sales report. is the January Real Retail Sales and Industrial Production. We saw a sharp increase in the income metric for November, and I think we may see another jump for December. The reason I say this is the expectation that a statistically significant amount of January income was no doubt moved to December to avoid expected tax increases. The November increase was also probably a result of tax planning. If so, then the January Real Personal Income (published at the end of February) will drop. For an illustration of the impact of this year-end tax planning strategy in the past, see this YoY Personal Income chart and note the two pairs of tax-planning callouts in the 1990s.
Here is a snapshot of the version of the Big Four Economic Indicators with Real Manufacturing and Trade Sales.
Last week I said that ECRI could take some temporary solace in their use of the lagging Manufacturing and Trade Sales, but the latest data point for that indicator, out yesterday, is the biggest month-over-month surge since before the last recession. Moreover, the December strength exhibited by Personal Incomes and Industrial Production and the (steady albeit slow) growth in Nonfarm Employment certainly continue to defy their recession call.
I would hasten to add, however, that I don’t think the US economy is out of the woods. However wrong ECRI might have been in their way-too-early recession call, significant risks remain. The greatest endogenous threat to the US economy is the impact of the expired 2% FICA tax holiday together with the decline in early 2013 personal income as a result of 2012 year-end maneuvers. The BEA sums it up nicely:
Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments. If John and Mary Doe are forced to cut back on spending, we could see a daisy-chain effect on retail sales, industrial production and employment.
Also, the Advance Estimate for Q4 GDP at minus 0.1 per cent bears watching. Of course, the Second and Third Estimates could adjust it higher. But the last time we had a final revised negative GDP print was a long time ago — the 0.1 per cent of Q4 1977.
The Usual Caveat: The recent economic data are subject to revision, so we must view these numbers accordingly. Nevertheless, I continue to think that an ECRI retraction of their recession call is long overdue.
Appendix: A Closer Look at the ECRI Index
Despite the apparent increasing irrelevance of the ECRI indicators, let’s check them out. The first chart below shows the history of the Weekly Leading Index and highlights its current level.
For a better understanding of the relationship of the WLI level to recessions, the next chart shows the data series in terms of the per cent off the previous peak. In other words, a new weekly high registers at 100%, with subsequent declines plotted accordingly.
As the chart above illustrates, only once has a recession occurred without the index level achieving a new high — the two recessions, commonly referred to as a “double-dip,” in the early 1980s. Our current level is 11.9% off the most recent high, which was set over five years ago in June 2007. We’re now tied with the previously longest stretch between highs, which was from February 1973 to April 1978. But the index level rose steadily from the trough at the end of the 1973-1975 recession to reach its new high in 1978. The pattern in ECRI’s indictor is quite different, and this has no doubt been a key factor in their business cycle analysis.
The WLIg Metric
The best known of ECRI’s indexes is their growth calculation on the WLI. For a close look at this index in recent months, here’s a snapshot of the data since 2000.
Now let’s step back and examine the complete series available to the public, which dates from 1967. ECRI’s WLIg metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.
The History of ECRI’s Latest Recession Call
ECRI’s weekly leading index has become a major focus and source of controversy ever since September 30th of last year, when ECRI publicly announced that the U.S. is tipping into a recession, a call the Institute had announced to its private clients on September 21st. Here is an excerpt from the announcement:
ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialised 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.” (Read the report here.) Year-over-Year Growth in the WLI
Triggered by another ECRI commentary, Why Our Recession Call Stands, I now include a snapshot of the year-over-year growth of the WLI rather than ECRI’s previously favoured method of calculating the WLIg series from the underlying WLI (see the endnote below). Specifically the chart immediately below is the year-over-year change in the 4-week moving average of the WLI. The red dots highlight the YoY value for the month when recessions began.
As the chart above makes clear, the WLI YoY, now at 5.8%, is unchanged from the previous weekly data. This is higher than at the onset of all seven recessions in the chart timeframe. The closest to the current level was the second half of the early 1980s double dip, which was to some extent an engineered recession to break the back of inflation, is a conspicuous outlier in this series, starting with a WLI YoY at 4.1%.
Additional Sources for Recession Forecasts
Dwaine van Vuuren, CEO of RecessionAlert.com, and his collaborators, including Georg Vrba and Franz Lischka, have developed a powerful recession forecasting methodology that shows promise of making forecasts with fewer false positives, which I take to include excessively long lead times, such as ECRI’s September 2011 recession call.
Here is today’s update of Georg Vrba’s analysis, which is explained in more detail in this article.
Earlier Video Chronology of ECRI’s Recession Call
- September 30, 2011: Recession Is “Inescapable” (link)
- September 30, 2011: Tipping into a New Recession (link)
- February 24, 2012: GDP Data Signals U.S. Recession (link)
- May 9, 2012: Renewed U.S. Recession Call (link)
- July 10, 2012: “We’re in Recession Already” (link)
- September 13, 2012: “U.S. Economy Is in a Recession” (link)
Note: How to Calculate the Growth series from the Weekly Leading Index
ECRI’s weekly Excel spreadsheet includes the WLI and the Growth series, but the latter is a series of values without the underlying calculations. After a collaborative effort by Franz Lischka, Georg Vrba, Dwaine van Vuuren and Kishor Bhatia to model the calculation, Georg discovered the actual formula in a 1999 article published by Anirvan Banerji, the Chief Research Officer at ECRI: The three Ps: simple tools for monitoring economic cycles – pronounced, pervasive and persistent economic indicators.
Here is the formula:
“MA1” = 4 week moving average of the WLI
“MA2” = moving average of MA1 over the preceding 52 weeks
WLIg = [m*(MA1/MA2)^n] – m