Saturday, December 08, 2007

ECRI Weekly Leading Index indicator rises sharply but still suggests a very sluggish outlook

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose sharply (+1.31% vs. -1.56% last week) but the six-month smoothed growth rate fell moderately (from -2.2 to -2.7, its lowest since the week of November 22, 2002), modestly below the flat line, suggesting that the economy will be somewhat lackluster and rather sluggish in the months ahead, neither booming nor busting.

The WLI does indicate the economic outlook is rather weak, but not so weak as to suggest that a recession is imminent.

According to ECRI, "With WLI growth falling to a five-year low, the U.S. economic growth outlook has clearly faded."

A WLI growth rate of zero (0.0) would indicate an economy that is likely to run at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to forecast a relatively stable "Goldilocks" economy.

The current reading for the smoothed growth rate is still too close to zero to discern with any great confidence whether the economy is really trending downwards or upwards. We may need another month or even two before the trend becomes clear.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate.

I will offer the caveat that the Weekly Leading Index and its smoothed growth rate do not tell us how strong the economy will be six or nine months from now, but do tell us whether whether weakness or strength is more likely a few months from now. It works best to tell us whether a "gathering storm" might be lurking just around the corner, but presently indicates relatively "clear weather" for the next few months, even if the interval is occasionally punctuated with financial market "gyrations."

-- Jack Krupansky

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