ECRI Weekly Leading Index indicator falls sharply and is now unambiguously recessionary

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell sharply (-1.00% vs. -0.29% last week) while the six-month smoothed growth rate was unchanged (at -10.4 last week), and is well below the flat line, suggesting that the economy will be struggling in the months ahead.

ECRI does in fact say that "With the WLI having dropped more than 13 points in the last nine months, it is exhibiting a pronounced, pervasive and persistent decline that is unambiguously recessionary." They did not actually say that the U.S. is in recession per se, but they are indicating that the trend of the data is clearly in a contractionary mode typical of recession. Whether we actually have a recession will depend on how the economy performs in the coming months.

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

I will raise my personal assessment of the chance of recession from 60% to 70% based on the magnitude of the negative level of the WLI smoothed growth index, the ECRI assessment, and the fact that although the data remains mixed, it is strongly biased towards weakness. I am also refraining from going higher that 70% because there simply has not been enough time for all of the positive stimulus in the pipeline to have had an effect on the real economy. The economy still has a very modest chance of avoiding an outright recession, but only if the data starts to improve within the next four to six weeks.

I am still at least somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signalling to me. Incidentally, the Intrade Prediction Market has the probability of a U.S. recession in 2008 at 70.1%, not that different from my own assessment.

-- Jack Krupansky