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ECRI Weekly Leading Index: All Signs Point to a Cyclical Slowdown in Inflation

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    July 27, 2017

    Today’s release of the publicly available data from ECRI puts its Weekly Leading Index (WLI) at 144.8, up from the previous week. Year-over-year the four-week moving average of the indicator is now at 4.99%, down from 5.12% last week. The WLI Growth indicator is now at 2.6, up from the previous week.

    “All Signs Point to a Cyclical Slowdown in Inflation”

    ECRI’s most recent headline article states that their U.S. Future Inflation Guage indicator is signaling a downturn in inflation. They claim that using the Phillips curve does not give a full picture of cyclical upturns and downturns. Rather than use the Phillips curve or extrapolate inflation data, ECRI says their Future Inflation Guage is a better indicator and has correctly anticipated the late 1990s growth without inflation and last year’s reflation trade. Read more

    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 above where it was at the start of the last recession.

    WLI since 2000

    RecessionAlert has launched an alternative to ECRI’s WLIg, the Weekly Leading Economic Indicator (WLEI), which uses 50 different time series from various categories, including the Corporate Bond Composite, Treasury Bond Composite, Stock Market Composite, Labor Market Composite, and Credit Market Composite. An interesting point to notice — back in 2011, ECRI made an erroneous recession call, while the WLEI did not trigger such a premature call. However, both indicators are now generally in agreement and moving in the same direction.

    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.

    WLI Complete Series

    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, new weekly highs register at 100%, with subsequent declines plotted accordingly.

    WLI Percent off Peak

    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. 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.

    WLI Growth 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.

    WLI Growth since 1965

    Year-over-Year Growth in the WLI

    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.

    WLI Year-over-Year

    The WLI YoY has been in positive territory for over 52 weeks and is now at 4.99%, down from 5.15% last week. The latest level is higher than at the start of all of the last seven recessions.

    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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