The ECRI Weekly Leading IndexAugust 20, 2010 weekly update
Today the Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) registered negative growth for the eleventh consecutive week, coming in at -10.0, a fractional improvement from last week's -10.2, which was a downward revision from -9.8. This number is based on data through August 13.The rate of decline from the peak in October 2009 is unprecedented in the Institute's published data back to 1967. Recently, however, the Institute has disclosed that two earlier decades of data not available to the general public contained comparable declines in WLI growth (in 1951 and 1966) when no recession followed (HT Barry Ritholtz).
The Published RecordThe ECRI WLI growth metric has had a respectable (but by no means perfect) record for forecasting recessions. The next chart shows the correlation between the WLI, GDP and recessions.
A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recession (1981-1982) by nine weeks. The WLI did turned negative 17 times when no recession followed, but 14 of those declines were only slightly negative (-0.1 to -2.4) and most of them reversed after relatively brief periods.
Three of the false negatives were deeper declines. The Crash of 1987 took the Index negative for 68 weeks with a trough of -6.8. The Financial Crisis of 1998, which included the collapse of Long Term Capital Management, took the Index negative for 23 weeks with a trough of -4.5.
The third significant false negative came near the bottom of the bear market of 2000-2002, about nine months after the brief recession of 2001. At the time, the WLI seemed to be signaling a double-dip recession, but the economy and market accelerated in tandem in the spring of 2003, and a recession was avoided.
The Latest WLI Decline
The question, of course, is whether the latest WLI decline is a leading indicator of a recession or a false negative. The published index has never dropped to the current level without the onset of a recession. The deepest decline without a near-term recession was in the Crash of 1987, when the index slipped to -6.8.
Can the Fed take steps to reduce the risk of a near-term recession? The next chart includes an overlay of the Federal Funds Rate.
Lowering the rate has been a primary tool for stimulating a weak economy. As the last chart shows, that tool is not available in our current situation.
Note from dshort: Recently this indicator has come under some scrutiny. See the harsh criticism by Mish Shedlock (ECRI's Lakshman Achuthan Still Blowing Smoke). Mich's article was a response to the mediating efforts of Barry Ritholtz (Weekly Leading Index (Still) Widely Misunderstood) in the wake of earlier Shedlock criticism (Has the ECRI Blown Yet Another Recession Call?).
Interestingly, Mish doesn't attack the validity of the WLI; rather he's annoyed by the seemingly self-serving spin of the co-founders in discussing the indicator, anxious not to be on the wrong side of a recession call.
'Atlas Shrugged': The CliffsNotes Today
'Atlas Shrugged" — Ayn Rand's fourth and last novel, published in 1957 — may be second to the Bible as the most influential book read in America, according to a Library of Congress survey. It is required reading in management training at BB&T, the 12th-largest bank in the U.S. and one that resisted taking TARP bailout funds.
Since the Obama administration took office, "Atlas Shrugged" has been enjoying a renaissance with rising sales and library waiting lists, partly because it explains our current economic woes more straightforwardly than most of what we hear from today's experts.
What happened in Rand's narrative is coming to pass today, with an anti-business administration reviling private industry and capitalizing on crisis to expand and redirect investment within and between sectors of the economy — setting quotas, prices and compensation.
Businesses responded by retrenching — ceasing to invest, innovate and expand. Whole industries contracted, closed down or moved offshore, much like the U.S. gas and oil drilling industry is doing today. Then, just as now, management became frustrated, discouraged and reluctant to create jobs in an environment of excessive government meddling.
A record $2 trillion now sits on corporate balance sheets waiting to be invested amid reasonably cheap asset prices. What holds back investment is uncertainty and fear stemming from an overbearing and free-spending government. Businessmen and investors would never attempt spending and borrowing their way back to prosperity.
The debt-financed Obama stimulus plan is not only failing to create jobs. It ratchets up systemic risk, inviting a currency crisis and bond-market collapse — from which recovery might be impossible.
President Obama recently took credit for a 0.2 -percentage-point drop in the nation's unemployment rate to 9.5% and the creation of 71,000 private-sector jobs, claiming his policies were working. In fact, many of those jobs were in the socialized automotive sector. The supposed decrease in unemployment resulted from 611,000 Americans giving up on finding work and dropping off the official rolls of the unemployed.
Official statistics mask the underlying truth of a private-sector economy that is failing to create jobs. In fact, when all those who have given up looking for work are accounted for since the recession began, the real unemployment rate may be closer to 18% — almost double the official numbers.
While the private sector shed nearly 8 million jobs in the last 2 1/2 years, the federal government increased its payroll by 240,000. So the private sector that is the primary source of national wealth has been shrinking while supporting a growing public sector that generally produces nothing.
1984 In its entirety
1984 In its entirety