The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) is at 135.8, up from the previous week's adjusted 134.8. The WLI annualized growth indicator (WLIg) fell to 4.5 from 4.8.
ECRI has been at the center of a prolonged controversy since publicizing its recession call on September 30, 2011. The company had made the announcement to its private clients on September 21st. ECRI's cofounder and spokesman, Lakshman Achuthan, subsequently forecast that the recession would begin in Q1 2012, or Q2 at the latest. He later identified mid-2012 as the start of the recession. Over the past two years he has been a frequent guest on the likes of CNBC and Bloomberg TV. In recent months he has adjusted the company's position, identifying the recession's "epicenter" as the half-year spanning Q4 2012 and Q1 2013.
[Hear: James Grant: Two Alternative Outcomes From Fed Policy - Much Higher Inflation or More Money Printing]
ECRI's Latest: "Cognitive Dissonance at the Fed?"
Last Friday (May 30th), ECRI posted a brief overview of post-recession GDP forecasts from the Fed's Open Market Committee and the less optimistic series from the Congressional Budget Office.
The commentary includes the following observation:
…official long-term trend GDP growth estimates have been quietly lowered this year to the 2.00% to 2.15% range. Among other reasons, this is notable because it recalls a fast-forgotten 2011 Fed paper suggesting that a reasonable estimate of the U.S. economy's recessionary "stall speed" was about 2%.
What Do Mainstream Economists Expect for Q2 GDP?
ECRI's relatively consistent stance on the economy contrasts rather sharply with the latest rather amazing spread of GDP forecasts from mainstream economists. Here is a snapshot of the Q2 GDP forecasts from the 48 professionals who participated in the June Wall Street Journal survey.
Check out that range of 1.0 to 5.8 percent range, and note those five Polyannas who are forcasting Q2 GDP in the 4.9 to 5.8 percent range. For some historical context: Q1 GDP contracted to -1.0 percent. The 10-year GDP moving average is 1.6 percent. Its average since the end of the last recession is 2.2 percent.
[Watch: Quarterly Webinar 2014 Q1 – Valuations, Economics and Interest Rates]
The ECRI Indicator Year-over-Year
Here is a chart of ECRI's data that illustrates why the company's published proprietary indicator has lost credibility as a recession indicator. It's the smoothed year-over-year percent change since 2000 of their weekly leading index. I've highlighted the 2011 date of ECRI's original recession call and the hypothetical July 2012 business cycle peak, which the company previously claimed was the start of a recession. I've update the chart to include the "epicenter" (Achuthan's terminology) of the hypothetical recession.
As for the disconnect between the stock market and the mid-2012 recession start date, Achuthan has repeatedly pointed out that the market can rise during recessions. See for example the 2:05 minute point in the November 4th video. The next chart gives us a visualization of the S&P 500 during the nine recessions since the S&P 500 was initiated in 1957. I've included a dotted line to show how the index has performed since ERIC's original July 2012 recession start date (now adjusted forward by three months).
Here are two notable developments since ECRI's public recession call on September 30, 2011:
- The S&P 500 is up 65.4% at yesterday's close, although off its record close on Monday, June 9th, when it was up 67.2%.
- The unemployment rate has dropped from 9.0% to 6.3%.
Crushed By the Fed
ECRI's recession forecast was doomed from the very day (September 21, 2011) that company alerted its private clients. On that same day the Fed announced Operation Twist, which was shortly thereafter followed by QE3.
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Eventually we will have another recession. But the aggressive monetary policy of the Fed appears to have dodged the recession bullet in ECRI's timeframe, regardless of the asset bubbles it may have created in doing so.
For alternatives to ECRI's recession forecasting, see method developed by Anton and Georg Vrba:
