ECRI Weekly Leading Index rises again

Continuing my ongoing but true "broken record": The recovery from the recession continues to poke along a bit too slowly for most people, but at least the trend is still positive and has almost started showing signs of life lately. The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) continues to be relatively weak, but also continues to show modest improvement, rising this week from 128.1 to 128.9, it's highest level since the first week of May, and the WLI annualized growth rate rose moderately, from +3.6% to +4.1%, its highest level since the third week of May and its fifth consecutive positive reading since May, and now well above the psychologically important -10.0% level that some pundits (but not ECRI) view as the threshold for a recession. The bottom line continues to remain that the WLI has remained fairly flat since the beginning of July (a low of 120.4 in mid-July.) That is not great, but this is at least not a worsening of the outlook. The much-feared double-dip recession is being kept at bay. In fact, ECRI recently "officially" made the call that there will not be a double-dip recession in the near future, saying that "With the WLI steadily gaining ground since the summer and now hitting a 24-week high, the much-feared 'double dip' has turned out to be a mirage." And in December they said that "With both the WLI and its growth rate rising to their best readings since May, a 'double dip' back into recession remains off the table, notwithstanding self-serving recession warnings that feed fear itself."

The WLI is clearly showing signs of life, but is still well below its peak of 134.7 in April of 2010, and modestly lower than the level of a year ago (131.0) when the recovery was underway in earnest. It may take another month or two (or three) before the WLI rises above its level of April of 2010. At that point private sector growth will have replaced the surge/reverse of the 2010 census temporary hiring.

A year ago we had had a massive bulge of stimulus, including the hiring of census workers, which peaked and is now rather dissipated. The slightly negative WLI growth rate is simply telling us that we are well down from that peak bulge. If the WLI were to deteriorate significantly further from here for a couple of months, that would be a problem, but  we're not headed in that direction at the present time.

The WLI suggests that the economy is likely remain weak for awhile, but a double-dip recession is still not in the cards from the WLI perspective. Still, the outlook does remain, as Ben Bernanke has said, "unusually uncertain."

Four big wildcards for the economy:

• When will unemployment initial claims finally fall off to a non-recessionary level?
• To what extent will Fed quantitative easing give the economy a boost, and for how long?
• How big a drag on the economy will come as the original congressional stimulus package (two years old in mid-February) winds down?
• How much more will state and local spending and employment decline as these governments continue to shrink down to sustainable, pre-housing boom levels?

Now we need to factor in a fifth wildcard:

• What impact will Republican fiscal activism in Congress have on the economy, if any? It could work both ways, either cutting government spending to the point of throwing the economy into an even deeper recession, or putting the government back on a firmer fiscal footing that inspires renewed financial and economic confidence. My view is that it will net out and be more of a sideshow to the overall economy even though balancing the federal budget is an important and laudable goal.

Still, even with all of those clouds hovering over head, the outlook for the U.S. economy is at least reasonably positive.

BTW, all of the financial turmoil in Europe (which is mostly just talk of financial trouble) will result in very little negative impact on the U.S. economy.

BTW #2, state and local government revenue, spending, and employment (and debt too) have already been on my radar for quite some time. There is no new and different impending crisis beyond the severe economic drags that have already been known for many months (or in some cases even years.) And contrary to some claims, there is no "complacency" on this issue. State and local governments do have a lot of painful decisions to make, but their fortunes follow from the overall U.S. economy rather than drive it. As national employment gradually recovers, state revenues will then show incremental improvement.

-- Jack Krupansky