Friday, April 25, 2008

ECRI Weekly Leading Index indicator rises slightly but index remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose slightly (+0.12% vs. +0.02% last week) and the six-month smoothed growth rate rose moderately (to -9.7 vs. -10.2 last week), but still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "WLI growth has recovered to an 11-week high, but remains deep in recession territory, therefore it is premature to forecast a business cycle recovery." I find the fact that "WLI growth has recovered to an 11-week high" at least a little promising.

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 and there is a lot of stimulus as well as potential problems in the pipeline.

I will keep 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 continues to improve at an increasing pace.

I continue to be very tempted to lower my assessment to 70% since I think the recent data shows that the so-called recession is not worsening, but I'll give the data another week or two to show that this "nascent recovery" is in fact showing some spine.

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 70%, roughly inline with my own assessment, maybe a little better since a lot of people act out of a visceral reaction to whether the latest news sounds good or bad, not to mention how their stocks are doing.

I would note that in three weeks, less than half of the most recent 24 weeks of WLI data will be higher than the current level. That means that even if the WLI remains flat, within three months if not two months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further. I would also note that the WLI is above the level of a month ago. There are some promising signs here, but some mixed signals as well.

-- Jack Krupansky

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