Friday, April 11, 2008

ECRI Weekly Leading Index indicator rises sharply but economy remains on recessionary track

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose very sharply (+1.60% vs. -1.36% last week) and the six-month smoothed growth rate rose slightly (to -10.7 vs. -10.8 last week), but still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "Despite the latest uptick, the WLI remains in a recessionary downturn."

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 keep my personal assessment of the chance of recession at 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 72.5%, roughly inline with my own assessment.

-- Jack Krupansky

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