The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) rose in today's update. It is now at 129.9 versus the previous week's 129.5 (revised upward from 129.3). See the WLI chart in the Appendix below. The WLI annualized growth indicator (WLIg) has eased, now at 6.3, down from last week's 6.4 (an upward revision from 6.2).
Of course, those of us who regularly follow ECRI's publically available data and commentaries understand that there is no logical connection between ECRI's proprietary indicators and their "pronounced, pervasive and persistent" recession call of September 2011.
Last year ECRI switched focus to their version of the Big Four Economic Indicators that I routinely track. But when those failed last summer to "roll over" collectively (as ECRI claimed was happening), the company published a news grab bag of indicators to support their recession call.
See also Lakshman Achuthan's recent interviews on Bloomberg, CNBC and Yahoo's Daily Ticker. Click the links to view the videos.
Essentially Achuthan is sticking to his opinion that a recession began in mid-2012, although he now calls it a "mild" recession, which is quite a shift from his original stance 16 months ago: "...if you think this is a bad economy, you haven't seen anything yet."
ECRI posts its proprietary indicators on a one-week delayed basis to the general public, but last year the company switched its focus to a 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 its website -- twelve weeks later -- along with the now clearly false assertion that "Indicators used to determine official U.S. recession dates have been falling since mid-year." Achuthan pinpoints July as the business cycle peak, thus putting us in the eighth month of a recession.
Here is a chart of ECRI's data that undermines the company's recession call -- 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 hypothetical July business cycle peak, which the company claims was the start of a recession.
A salient feature in the "Yo-Yo Years" report is the use of year-over-year variants for selective indicators, for example, this tight close-up of employment:
These charts look quite disturbing. But let's take a longer look back at the left chart in the two-pack above. Here is the year-over-year of the monthly Nonfarm Employment data back to 1940. ECRI's close-up of the last six months, with a cropped vertical axis from 1.1% to 1.9%, is a microscopic view of a few bacteria in a Petri dish -- not persuasive evidence that a recession started last July.
If you click on the chart above for a larger version, you'll see links above the chart that will take you to the YoY equivalents for the other indicators, including the Manufacturing and Trade Sales variant the ECRI has previously preferred for its sales data.
The data series I personally find the most concerning as a recession harbinger is Real Personal Income Less Transfer Payments. But as I've pointed out elsewhere, the latest YoY data for this series is skewed by the 2012 year-end tax strategy. The February data, available two weeks from today, will be extremely important.
Ultimately my opinion remains unchanged from last week: The recent ECRI media blitz is best understood as an effort to salvage credibility in hopes that major revisions to the key economic indicators -- notably the July annual revisions to GDP -- will validate their position.
ECRI's Recession Call Was a Bet Against the Fed
Let's briefly review the history of the ECRI recession call. ECRI 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 controversial 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)
Ironically enough, on the same day ECRI forecast a recession, Chairman Bernanke announced a new policy, Operation Twist, which was followed by QE3 in September 2012 and unlimited easing (aka QE4) in December 2012.
Essentially ECRI claim that "there's nothing that policy makers can do to head it [a recession] off" was a bet against the Fed.
For a few months after ECRI's recession call, their proprietary indicators cooperated with their forecast, but that has not been the case since the second half of 2012 -- hence their switch to the traditional Big Four recession indicators. Now that those are less cooperative, ECRI is cherry picking other indicators and switching to year-over-year perspectives when the monthly trend isn't sloping downward.
My Personal View...
The Fiscal Cliff is behind us, but the 2% FICA increase is apparently weighing on consumer sentiment, as the latest Michigan data suggests. The underlying trend in core personal income, if you exclude the tax-planning blip, is showing slight deterioration. On the other hand, today's Industrial Production data looked good, and Real Retail Sales announced this week surprised to the upside. ECRI's preferred metric for sales, the lagging Real Manufacturing and Trade Sales data (updated two weeks ago, data through December), was strong in November and December. Here is a snapshot of ECRI's version of the Big Four Economic Indicators.
Despite my rejection of ECRI's call that a recession began in mid-2012, I do think the US economy remains vulnerable. The greatest endogenous threat is the ongoing impact of the expired 2% FICA tax holiday, disappointing Personal Income and the real impact of sequestration, which has scarcely begun. Previously acknowledged exogenous risks are reemerging in eurozone recessions and the political stalemate in Italy may be copycatted elsewhere in the eurozone periphery.
The Second Estimate for Q4 GDP at 0.1 percent bears watching. Of course, the third Estimate could adjust it higher. But earlier hope that an improved trade balance would boost the Second Estimate didn't pan out.
The Usual Caveat: The recent economic data are subject to revision, so we must view these numbers accordingly.
Source: Advisor Perspectives
