Friday, April 04, 2008

ECRI Weekly Leading Index indicator falls sharply, economy on recessionary track

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell sharply (-1.35% vs. +0.69% last week) and the six-month smoothed growth rate fell moderately (to -10.7 vs. -10.0 last week), well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "With the WLI continuing its slide and WLI growth back at its cycle low, an end to the recession is nowhere in sight."

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 to 75% 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 than 75% because there has not been enough time for all of the positive stimulus in the pipeline to have had an effect on the real economy and the depth of the declines are simply not deep enough to indicate that a recession is imminent. The economy still has a very modest chance of avoiding an outright recession, but only if the data starts to improve soon.

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, as well as ECRI's assessment and recession "call." Incidentally, the Intrade Prediction Market rates the probability of a U.S. recession in 2008 at 73%, roughly inline with my own assessment.

The decline of 80,000 payroll jobs is certainly a negative and points in the direction of a recession, but the total magnitude of jobs losses (less than 300,000) is still too small to indicate a full-blown recession.

-- Jack Krupansky

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