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ECRI Finally Admits On ‘False-Alarm’ Recession Forecast

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    May 9, 2015

    Friday’s release of the publicly available data from the Economic Cycle Research Institute (ECRI) puts its Weekly Leading Index (WLI) at 134.2, unchanged from the previous week. The WLI annualized growth indicator (WLIg) is at 0.5, up from the previous week’s -0.1 and well off its interim low of -4.7 in mid-January.

    Oil Price Volatility, Recessions and “The Greater Moderation”

    ECRI finally admits to a bad recession call in September 2011, referring to it as a “false alarm”. They describe the situation as “Greater Moderation“, where the 2012-2013 downturn was the worst “non-recession” in 50 years and is unlikely to be repeated.

    The September 2011 call was made because of the slowing trend growth that put the economy in a window of vulnerability to exogenous shocks. Historically oil price shocks have been a recession trigger. But following ECRI’s 2011 recession call, oil volatility has been at a record low.

    The article includes an interesting overview of current recession risk:

    The critical implication — with secular stagnation or some variation thereof now being widely acknowledged — is that most major developed economies, including the U.S., are operating closer to the edges of their windows of vulnerability. So, unless the Greater Moderation ushered in by rock-steady oil prices becomes a reliable feature of the economic landscape, we may be closer to the next recession than many believe; the only question is when it will arrive.

    See also Achthan’s Bloomberg TV interview on the subject, which is linkable from ECRI’s home page.

    The ECRI Indicator Year-over-Year

    Below is a chart of ECRI’s smoothed year-over-year percent change since 2000 of their weekly leading index. The latest level is fractionally higher than it was at the start of the last recession.

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    Appendix: A Closer Look at the ECRI Index

    The first chart below shows the history of the Weekly Leading Index and highlights its current level.

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    For a better understanding of the relationship of the WLI level to recessions, the next chart shows the data series in terms of the percent off the previous peak. In other words, a new weekly high registers at 100%, with subsequent declines plotted accordingly.

    Click to View
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    As the chart above illustrates, only once has a recession ended 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 still off the most recent high, which was set back in June of 2007. We’ve exceeded 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.

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    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.

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    The History of ECRI’s 2011 Recession Call

    ECRI’s weekly leading index has become a major focus and source of controversy ever since September 30, 2011, 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:

    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.” (Read the report here.)

    Year-over-Year Growth in the WLI

    Triggered by another ECRI commentary, Why Our Recession Call Stands, here is a snapshot of the year-over-year growth of the WLI rather than ECRI’s previously favored 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.

    Click to View
    Click for a larger image

    The WLI YoY is in the negative zone, now at -0.9%, up slightly from -1.0% last week and off its interim low of -2.3% set in mid-January. The latest level is fractionally higher than it was at the start of the last recession. This indicator has only rarely dipped below its recent interim low outside recessionary periods: Lower levels occurred in 1988 and also during the economic volatility following the last recession.

    Weak US Economy but Not in Recession

    At some point ECRI backed off its claim of a US recession in the late 2011 to early 2013 time frame. For example, in a mid-November Al Jazeera America interview Lakshman Achuthan reiterated the US economy is weak but dismissed the idea that it is headed toward recession.

    Additional Sources for Business Cycle 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 includes excessively long lead times, such as ECRI’s September 2011 recession call.

    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
    “n”= 52/26.5
    “m”= 100
    WLIg = [m*(MA1/MA2)^n] &– m

    Images: Flickr (licence attribution)

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.


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