Thursday, July 15, 2010

What is the ECRI Weekly Leading Index telling us about the economy?

Most people and economists seem willing to acknowledge that the U.S. economy is going to slow to some extent for the rest of the year and even well into 2011, but whether it will slow enough to constitute a double-dip recession is a different matter. The truth is... unknown and a matter of debate, but as of July 9, 2010, the Economic Cycle Research Institute (ECRI) has said that "a slowdown in U.S. economic growth is imminent, but a new recession is not." In other words, even ECRI does not believe that their Weekly Leading Index (WLI) is forecasting a double-dip recession. ECRI is forecasting a slowdown, but no recession. End of story, for now. Of course, the data will continue to unfold on a weekly basis.

Usually the media and market commentators pay little attention to ECRI and its Weekly Leading Index (WLI), but lately a number of Wall Street pundits have been touting the WLI as indicating that a recession is imminent. In response, others on Wall Street are disparaging such leading indicators. As is to be expected whenever two extremes are being loudly promoted, the truth is somewhere in the middle.

The battles over the ECRI WLI became so extreme that ECRI posted an essay on July 1, 2010 entitled "WLI Widely Misunderstood" closes with:

Bottom line, neither the "experts" predicting that the sky is falling based on the WLI, nor the other "experts" indulging in misinformed WLI-bashing in an effort to discredit the super-bears, have a real clue to what the WLI is all about. We created the WLI not to be an infallible, stand-alone recession-forecasting machine, but as one small part of a much larger array of leading indexes (each made up of many economic indicators) -- like the especially prescient U.S. Long Leading Index. This array amounts to a sophisticated sequential signaling system of the economy's cyclical turning points. The WLI is designed to be interpreted in this broader context, and its message today is quite simple: a slowdown in U.S. economic growth is imminent, but a new recession is not.

How much clearer do they have to get? Well, Wall street hates clarity since it interferes with their ability to spin up stories that enable them to con you out of as much of your money as they can.

Again, just to confirm, the current ECRI view is:

a slowdown in U.S. economic growth is imminent, but a new recession is not.

-- Jack Krupansky


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