Friday, December 09, 2011

ECRI Weekly Leading Index recovers a bit

The ECRI Weekly Leading Index (WLI) rose sharply today, more than recovering from its sharp decline last week, although the smoothed growth rate of the index did not recover all of its decline from last week. Unfortunately, that is too much volatility in too short a period to sense the true trend, but that's the nature of the period we are in. The WLI level is really only modestly above its recent low for the past year which it hit for a second time three weeks ago and its smoothed growth rate is moderately negative, so the bottom line is that this "short leading indicator" is suggesting that the economy will be rather weak in the relatively near future (next month or two or three). The WLI itself does not appear to be solidly forecasting a recession yet, but ECRI reminds us that the WLI is a "short" leading indicator, not suitable for forecasting very far in the future.
 
I watched the Bloomberg interview of Lakshman Achuthan of ECRI yesterday and he insists that ECRI's "call" from late September that the U.S. economy is "tipping into recession" is still "intact." ECRI makes the point that the WLI is a "short leading indicator" while their recession call is based on a variety of "long leading indicators."
 
Although we may not be directly experiencing a recession right now in terms of the latest economic reports, ECRI points out that a lot of the economic measures have "decelerated" since the beginning of the year, which is not a very good sign for the future of the economy in the coming periods.
 
They also point out that the U.S. economy doesn't have a history of being able to muddle along at low levels of economic activity for very long without actually dipping into recession, so they assert that if we continue to muddle, then recession is inevitable.
 
They concede that a recession did not likely start in Q3, and would only say that their call was wrong if the economy did not dip into recession by the end of the second quarter of 2012. In any case, they say that it will be a full year before anybody can definitively say they are wrong with their call because it takes a number of months of data revisions until we have a clear view on what happened in a given period.
 
So, the bottom line appears to be that ECRI is forecasting a recession that may or may not start in Q4 (current quarter) but certainly will start before the end of Q2. Once again they refrained from forecasting the length or depth of the potential recession.
 
I will continue to defer to ECRI since they are the experts on recession calls, so far, but I have to admit that this time around I am more than a little skeptical about the absolute certainty of recession. Sure, there is clearly an elevated risk of recession, but that's as far as I'll go at this time.
 
The thing to focus on in the near term is signs of further deceleration rather than outright decline in level of economic activity.

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