ECRI Update: Flunking Recession 101
The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) rose in the latest public data. It is now at 128.3 versus the previous week's 127.2. See the WLI chart in the Appendix below. Likewise the WLI annualized growth indicator (WLIg) rose, now at 5.4, up from last week's 4.6. WLIg has been in expansion territory since August 24th, although it is off its 6.0 interim high on October 12th.
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 currently features on their website. Achuthan pinpoints July as the business cycle peak, thus putting us six months into a recession.
Here is a chart that clearly illustrates why ECRI's weekly indicators are of little value: The smoothed year-over-year percent 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. 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 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.
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 percent 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, released today, is through October. The Real Retail Sales data I track includes November.
My Personal View...
Now, in the waning days of the year, the media focus is on the December 31st Fiscal Cliff. Meanwhile, the economy, as I've repeatedly remarked, has been walking a tightrope during much of year. However, the rebound in last week's release of the November Personal Income data was quite encouraging. And this follows the strong rebound in November Industrial Production reported the previous week. In my opinion the economic data does not support the claim that a recession began in July 2012. Of course, our politicians could torpedo the economy in early 2012 by mishandling the Fiscal Cliff budget issues.
Here is a snapshot of the version of the Big Four Economic Indictors with Real Manufacturing and Trade Sales.
ECRI can take some temporary solace in their use of the lagging Manufacturing and Trade Sales, which won't include November data until the end of January. But the November strength exhibited by Personal Incomes and Industrial Production certainly undermines their recession call. My take is that ECRI has flunked the "Recession 101" course.
The Usual Caveat: The recent economic data are subject to revision, so we must view these numbers accordingly.