Doug Short: The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) is at 131.9, up from last week’s 130.9. The WLI annualized growth indicator (WLIg) to one decimal place, slipped to 1.9, down from 2.1 last week.
Last year ECRI switched focus to their version of the Big Four Economic Indicators that I routinely track. But when those failed last summer to “roll over” collectively (as ECRI claimed was happening), the company published a new set of indicators to support their recession call in a commentary entitled The U.S. Business Cycle in the Context of the Yo-Yo Years (PDF format). Subsequently the company took a new approach to its recession call in a publicly available commentary on the ECRI website: What Wealth Effect?. That commentary includes a brief discussion of the Personal Consumption Expenditure (PCE) deflator, which I’ve discussed in more detail here. It also includes an illustration of the shrinkage in US imports since the post-recession peak nearly three years ago.
In early November, after about three months of hibernation, ECRI co-founder spokesman Lakshman Achuthan appeared on Bloomberg TV, reaffirming his company’s recession call.
Earlier this month, the ECRI website posted a new Becoming Japan: Update, which features this overlay:
Here is ECRI’s key message:
|What many still fail to acknowledge is that the major Western economies – including the U.S.– are effectively becoming Japan: the comfortable consensus is that, in contrast to the Eurozone, inflation in the U.S. should be (to quote the Fed) “moving back toward its longer-run objective” of 2%, and thus not a concern.
But should it be a concern, with yoy growth in the Personal Consumption Expenditures deflator falling to a four-year low of 0.7%, increasingly distant from the Fed’s 2% target, precisely as ECRI had predicted?
Although I disagree with ECRI’s recession call, the company is correct in its assessment of the Fed’s inability to lift inflation to its target. For more on that topic, see my twice monthly update: Two Measures of Inflation: CPI and the PCE Price Index and Fed Policy.
The ECRI Indicator Year-over-Year
Here is a chart of ECRI’s data that illustrates why the company’s published proprietary indicator has little credibility as a recession indicator. It’s the smoothed year-over-year percent change since 2000 of their weekly leading index. I’ve highlighted the 2011 date of ECRI’s recession call and the hypothetical July 2012 business cycle peak, which the company claims was the start of a recession.
As for the disconnect between the stock market and the recession that ECRI claims began in July 2012, Achuthan has repeated pointed out the market can rise during recessions. See for example the 2:05 minute point in the November 4th video. The next chart gives us a visualization of the S&P 500 during the nine recessions since the S&P 500 was initiated in 1957.