ECRI Weekly Leading Index indicator falls sharply and suggests high risk of recession

[Note: I did not receive the ECRI report this week, so this post is based on the Reuters report.]

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell sharply and the six-month smoothed growth rate fell moderately, remainng moderately below the flat line, suggesting that the economy will be somewhat sluggish in the months ahead.

According to the Reuters story, the WLI fell due to higher jobless claims, weaker housing activity, and lower stock prices.

According to ECRI, "WLI growth has dropped back to the six-year low seen in early January. While the economy and employment did continue to grow through the end of 2007, the window of opportunity to avert a U.S. recession is about to slam shut."

Maybe close, but still not quite there.

Please note that overall mortgage application activity was up strongly this week, with refinancings strongly outweighing the decline in applications for purchase, and that the four-week moving average for purchase applications did tick higher as well. Also note that the weekly data is very volatile.

The bottom line is that the ECRI WLI is "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator.

Nonetheless, as a result of this data, I will raise my own assessment of the chance of recession from 1 in 4 to 35%.

I would need to see a real "stumble" in the data to go up to even a 50% chance. Give the economy another month or so to see if the the weakness actually does start to "snowball." Without the "snowballing" we will simply have a slowdown and not a true recession.

-- Jack Krupansky