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In The Great Recession and Recovery the ECRI makes the following bold statement:
"The [WLI] is an index that’s been around for over a quarter of a century, and over that time (shown here) it has correctly predicted every recession and recovery in real-time."
That is quite an amazing claim and here is a chart depicting the claim.
ECRI Weekly Leading Index
The article uses this slide as proof of its call of the current recession in advance.
The article states:
And we issued a clear Recession Warning noting that “The magnitude of oil and interest rate shocks are near recessionary readings.” A month later, as we now know, the recession began.
Inquiring minds want to know exactly what the ECRI said in November 2007.
Please consider the following snips from the November-December 2007 ECRI Outlook.
Key November 2007 Statements
Please read those clips carefully.
ECRI: "The difference this time is that, even though the shocks have arrived, good leading indicators like the USLLI are not showing recessionary weakness ... This is a key reason why the economy is not yet in a recession. .... weakness is not pronounced, pervasive and persistent enough to be recessionary. .... leading indexes are still holding up sufficiently for a recession to be averted."
The claim "It's different this time" is always a huge warning sign.
Given the recession started in December, the statement "weakness is not pervasive and persistent enough to be recessionary", indicates the ECRI's leading indicators do not always lead in any meaningful way.
Room For Rate Cuts
Saturday, January 05, 2008
ECRI Says Fed Has Room To Cut Rates Despite Fears of Inflation
"WLI growth is now at its worst reading since the 2001 recession. However, the WLI's recent decline is not based on pervasive weakness among its components, suggesting that a recession could still be averted," Achuthan said.Somehow a recession that had already started could be avoided.
Window of Opportunity
Friday, January 25, 2008
ECRI Says There Is A Window of Opportunity for the US Economy
The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI’s Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession.ECRI Denial
Self-Fulfilling or Self-Negating?
If we have a recession this year, it will be the best advertised in history. Recently, several Wall Street houses joined the 70% of Americans who have been expecting a recession for the last few months. A number of other prominent economists boosted their estimates of the probability of a recession above 50%.
Yet such probability estimates imply that a recession is a matter of chance, whereas it is still a matter of choice. This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.
If we have a recession this year, it would turn out to be the most widely anticipated recession in history. Clearly, the pessimism of consumers and business managers could cause them to cut spending, creating a self- fulfilling recession prophecy. But there is another side to the story.
At turning points, a few months’ lag in policy action can be immensely costly. If it spells the difference between a recession and a soft landing, a couple of months’ delay can end up costing a couple of million jobs and couple of hundred extra basis points in rate cuts – and still not have the same effect. What a stitch in time can accomplish early in a down cycle cannot be achieved, even with far more aggressive action, a few months down the road. At best, forceful but delayed action can mitigate the severity of a recession.
The ECRI laid it on pretty thick, openly mocking the "best advertised [recession] in history" while claiming "This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet."
The irony is the recession was about 2 months old at the time.
Recession of Choice
Friday, March 28, 2008
ECRI Calls it "A Recession of Choice"
The U.S. economy is now on a recession track. Yet this is a recession that could have been averted. In January, given the plunge in the Weekly Leading Index, we declared that the economy had entered a clear window of vulnerability. Yet we emphasized the brief window of opportunity within that window of vulnerability for timely policy stimulus to head off a recession.Recession of Choice?
It is a somewhat different story with regard to GDP, because the cyclically volatile manufacturing sector still accounts for 36% of GDP. A mild downturn in that sector should limit the decline in GDP in this recession.
In fact, we may or may not see two straight down quarters of GDP in this recession. But, contrary to popular belief, as we have detailed* elsewhere, that is neither a necessary nor a sufficient condition for a recession.
Some will rightly argue that recessions are cathartic and that to try and avert a recession with stimulus would be tantamount to rewarding the bad behavior of those contributing to the housing and credit bubbles. Perhaps, but we must also recognize that recessions bring with them collateral damage affecting millions of innocent bystanders.
The bottom line is that the outcome was not pre-ordained. Policy-makers had a choice about the speed with which stimulus took effect. If they had understood this, their actions could indeed have averted this recessionary downturn.
As noted above, on March 28, 2008, the ECRI states we are on a "recession track". At that time, the recession was already underway for a minimum of three months.
This statement is worth repeating: "In fact, we may or may not see two straight down quarters of GDP in this recession. But, contrary to popular belief, as we have detailed elsewhere, that is neither a necessary nor a sufficient condition for a recession."
The idea that this recession could have been prevented is far beyond silly. The excesses and reckless behaviors in residential real estate, commercial real estate, derivatives, credit lending, securitizations, credit cards, and debt at every level (not just in the United States but globally) were such that not only was a recession baked in the cake, but that a gargantuan consumer-led recession was 100% guaranteed.
There is absolutely nothing the Fed could have done to avoid this recession. To believe otherwise is foolish.
ECRI's May 2007 Housing Bottom Is In Call
Inquiring minds may also be interested in the ECRI's Housing Bottom Call May 16, 2007. Please consider Building Plans Fall, But Some See Hope
The Economic Cycle Research Institute's Leading Home Price Index is "pointing to a bottom in home prices" and signaling a recovery in demand, said Lakshman Achuthan, ECRI's managing director."Unemployment is near a five-year low. That should keep demand relatively strong while limiting foreclosures. Because there's no recession, people's perceptions of their ability to pay off their obligations is healthy enough."
Job growth has slowed, but unemployment is near a five-year low. That should keep demand relatively strong while limiting foreclosures.
"Because there's no recession, people's perceptions of their ability to pay off their obligations is healthy enough," Achuthan said.
Thanks go to the Canada Housing Crash Blog for pointing to some of the above ECRI links.
A Look At ECRI's March 2001 Recession Call
In light of the above inquiring minds are likely interested in ECRI March 2001 Cyclical Outlook.
Right off the bat I commend the ECRI for the opening statement "Recession No Longer Avoidable".
However, I must also point out the recession had already started.
To be fair, they did note weakness 3-6 months in advance, unlike the most recent recession. Then again, by the time the ECRI was actually brave enough to say the recession started, the S&P 500 was down about 18% and the Nasdaq composite was down about 55%.
A strategy to exit the market on the ECRI's recession call is better than nothing, yet it leaves a lot on the table compared to a strategy of getting the hell out of the way when the yield curve inverts.
March 2001 Statements Worthy of Mention
- "Rising unemployment will damage confidence, hurting services, growth and causing a recession."
- "Nothing can undermine confidence as much as the serious increase in joblessness that is no imminent."
- "For a decade, recession in the US was kept at bay by a combination of luck and skill. But in market economies, recessions cannot be postponed indefinitely. As imbalances build, they demand the catharsis of a recession, which lays the foundation for the subsequent recovery."
It is hard to fault any of those statements.
Indeed, I would especially like to point out the statement "recessions cannot be postponed indefinitely".
Pray tell, just where did the idea "recessions of choice" come from?
Unemployment Rate 1999-2009
Moreover, one does have to wonder how the ECRI clearly spotted the "serious increase in joblessness" in 2001 but failed to see far worse conditions developing in 2007. After all, the housing bust had begun and a commercial real estate was as sure to follow as night follows day.
No False Signals?
The ECRI claims to have called every recession with no false signals. The data above shows they did not call this recession and they were light-years off on the housing bottom and on unemployment.
Let's return to the the opening chart, this time with annotations.
I circled seven instances of a downturn in the WLI, all pretty much indistinguishable from the downturns at recession time. Take a good look at 2001 and 2007. The difference is in the magnitude of the drop.
The ECRI was unwilling to actually call the 2001 recession until the month it happened. By then it was obvious and their data confirmed. In contrast, the ECRI failed to call a recession in 2007 until a similar drop occurred. By then the recession was well underway.
Given that recessions are fairly rare, the safe thing to do is simply not predict them until they are obvious. That way, you do not have any "false signals", but it also guarantees the call will not be very "leading" either.
The ECRI's actual 2001 recession call was coincident with the start of the recession while the 2007 recession call was a minimum of 3 months late, with doubt and/or denial every step of the way.
How Big Is That Lead Time?
Given that we have seen one instance of a 3 month lag and one instance of being exactly on time (with a possible theoretical warning 6 months prior on the 2001 recession), inquiring minds might be interested in ECRI's stated lead time.
Please consider this statement from the ECRI Business Cycle Glossary.
The WLI has an average lead of 10 months at business cycle peaks and three months at business cycle troughs, which amounts to a longer overall lead than the LEI.
Does data support the claim of "an average lead time of 10 months"?
What is the makeup of the WLI?
The WLI index may have changed but this January 27, 2002 article Recession over. ECRI says so! offers a strong hint.
On Friday, the big news (to us, anyway) came in the form of the ECRI declaring an “imminent recovery” of the U.S. economy. The call: the economy will start its recovery at the end of this quarter.2002 "Imminent Recovery"
According to the ECRI, the weekly leading index (or WLI—which they have used to predict the current recession and the potential recovery) is composed of seven components. The seven components include: the Mortgage Bankers Association's home purchase index, money supply, stock prices, initial jobless claims, corporate yield spreads (inverted), and corporate bond quality spreads (we got this straight off from an ECRI press release and strangely, there are only six components here).
Note the date of the 2002 "Imminent Recovery" call: January 2002.
It appears the ECRI got caught predicting an "imminent recovery" based on a recovery in the stock market.
At the point of ECRI's recovery forecast, the SPX was making its first post-9/11 rally highs at a January 2002 close of ~1,130 (print high of 1,177). The SPX fell thereafter from April 2002 by ~30% to the September closing low and ~35% peak to trough in October.
The SPX made a secondary higher low in March 2003 some 14 months after ECRI's "imminent recovery" call.
One of the ECRI leading indicators is Money Supply. Let's check how that might work in practice.
M2 Percent Change From A Year Ago
Exactly what does that chart say?
Maybe they are looking at that data differently but this next chart sure isn't it either.
M2 Money Supply
ECRI vs. the S&P 500
The CXO Advisory group has an interesting article on ECRI's Weekly Leading Index and the Stock Market.
Using WLI readings for 3/2/01 to 3/27/09 (423 weeks) and contemporaneous weekly S&P 500 index data we find ....The CXO Article shows several other scatter charts all suggesting the same thing, the ECRI does not lead the stock market, rather it is coincident or slightly lagging. To be fair, the ECRI attempts to time business cycle changes, not every stock movement.
The shapes are generally similar, but the degree to which WLI leads or lags the stock market is not obvious. Because stock market behavior is an input to the WLI, two series should display some similarity. ....
To test whether WLI exhibits any cumulative and exploitable predictive power for stocks, we relate weekly change in WLI (as revised) to the change in the S&P 500 index from initial release to four weeks later, from initial release to 13 weeks later and from initial release to 26 weeks later. The Pearson correlations for these three relationships are 0.05, 0.06 and 0.06, respectively, all close to zero. In contrast, the correlation between the weekly change in WLI and the change in the S&P 500 index during the four weeks prior to WLI release is 0.33, again suggesting that WLI lags rather than leads the stock market.
In summary, ECRI WLI movements probably coincide with or slightly trail stock market behavior, offering no significant trading intelligence over the short or intermediate terms.
Is the Stock Market a Leading Indicator?
In Is the Stock Market a Leading Indicator? I posted two charts that clearly show the stock market is at best a coincident indicator.
S&P Monthly Chart 1980-1992To whatever the extent the ECRI is using the stock market as a leading indicator appears to be wrong. For a look at indicators that do work, please see Foolproof Recession Indicators.
click on chart for sharper image
Vertical bars on the chart show when recessions began. There were three recession isn this period, starting January 1980, July 1981, and July 1990 according to NBER Business Cycle Expansion and Contraction Data. The NBER is the official determinant of recessions.
Looking at a chart of the S&P it is difficult to suggest the Stock Market is a leading indicator, coincident perhaps but certainly not leading.
Moreover, the biggest decline during the period was a 35.9% drop in 1987, a period in which there was no recession. Furthermore, I circled four areas with very similar patterns in the 1980-1992 timeframe that were recessions following essentially sideways corrections in the S&P 500. Two of them were recessions, two were not.
For the 1981 recession and the 1990 recession, one could only tell there was a recession coming in hindsight. Finally the January 1980 recession vs. the S&P 500 looks like noise. The stock market actually rose at the start of the recession.
S&P Monthly Chart 1998-2009
click on chart for sharper image
There were two recessions in the 1998 - 2009 timeframe. The clearest case that the stock market is leading came in the recession that began in March 2001. However, the recession ended in November 2001 yet the stock market made a substantial new low mid-2002 with a double bottom test in Spring of 2003.
The stock market declined 34% after the recession was over. Is that a leading indicator? Of what?
For the recession that began in December 2007, the S&P 500 was down only a few percent from its all time high. Is that a leading indicator?
Clearly the answer is no. The S&P 500 was a coincident indicator for the entire recession. The NBER has not yet declared the end of the recession but it will do so and it will be backdated, most likely to Spring of 2009.
If so, the market will have proven to have been a coincident indicator, known only in hindsight.
Unfortunately, those indicators may now be useless as it is highly unlikely 3 month treasuries invert with 10-year treasuries for a long time. The next inversion may be between the 10 year note and the 5 year note or the 5 year note and the 2 year note.
Once again, it's important to be fair. Inverted treasuries only predict recessions, they do not give "all clear" signals. The ECRI attempts to time in both directions and they did catch this last bottom nicely.
Where To From Here?
The key question is not where we are, but where we are going.
Lakshman Achuthan at the ECRI says The Pessimists Are Wrong: No Downturn Anytime Soon.
Think the stock market bulls are full of B.S.? You might want to rethink.That stocks are an "imperfect indicator" is certainly an understatement. Yet ....
Or, more accurately, you might need an attitude adjustment. While it's normal to be pessimistic about the future given what we've just lived through, it's also wrong, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) tells Tech Ticker.
"The mistake in the emotional attitude is related to the size of the cycle," he says, citing a favorite quote at ECRI: "The error of optimism dies in the crisis but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant. That giant error of pessimism is still running rampant, and will keep most people mired in gloom, long after the Great Recession is history."
Achuthan concedes stocks are an imperfect leading indicator. That being said, there's a strong chance "we don't have a downturn in the stock market of any significance anytime soon," he says, citing ECRI's 100-plus years of data on business cycles.
It's a V! Recovery "A Lot Stronger" Than Consensus
Inquiring minds are reading It's a V! Recovery "A Lot Stronger" Than Consensus, ECRI's Achuthan Says.
Good news for those worried about the economy: "We are in the early stages of the recovery and it looks to be a lot stronger" than the consensus for modest 2%-3% GDP growth, says Lakshman Achuthan, managing director of the Economic Cycle Research Institute (ECRI).
Furthermore, the recovery will be "V-shaped" and is now "virtually unstoppable" - at least through the first half of 2010 -- Achuthan says, citing a "positive contagion" in the economy right now, based on leading economic indicators. Most notably, the ECRI's index of Weekly Economic Indicators just hit a new record high.
The cycle watcher also points out that a recovery, by definition, doesn't just mean GDP goes positive. "It must include jobs growth and consumption," which Achuthan says will start to recover by early 2010, at the latest.
The "L" Shaped Recession
The ECRI caught the bottom nicely this go around but the recovery call itself is suspect.
If you need further persuasion, please refer to the "imminent recovery" chart of the S&P500 from 2001-2003 posted earlier.
I am sticking with what I said in the Case for an "L" Shaped Recession written April 8, 2008.
Now that it's clear we are in a recession, the question has arisen as to what shape it will take: "V", "U", "L", or "W".Note that in April 2008 the NBER had not officially declared the start of the recession yet. Also note that the ECRI could only muster up a "recession track statement".
The "W" talk seems based on the idea that there may be a brief rebound in the second half based on the Bush economic stimulus plan. That stimulus plan will fail but perhaps it temporarily pulls the US out of recession for one or two quarters.
More likely to me is something like an "L" or a "WW" kind of scenario with the U.S. slipping in and out of recession for a prolonged period of time, perhaps 3-4 years or more.
However, that was then and this is now. One must stick to an analysis of the data at hand. Things can and do change.
This is what I see now: In spite of the change in the stock market, unemployment is high and rising, foreclosures are high and rising, banks are not lending, consumers are not spending, and the government is the buyer of only resort for mortgages. The deleveraging process continues while banks continue to tighten credit and finally, commercial real estate is imploding.
Those "real economy" conditions are not the makings of a strong recovery, perhaps not any recovery.
Rosenberg Sees String Of W's
Inquiring minds are reading Rosenberg Sees Low-To-No-Growth as Kantor Vows Vigorous Economy
David Rosenberg says buy bonds or seek dividends, because this isn’t a normal recovery. Rosenberg, the chief economist and strategist for Toronto- based Gluskin Sheff + Associates Inc., was among the first to warn of impending recession in 2006.Not The Typical Business Cycle
“Right now the economy is being held together by very strong tape and glue provided by the Fed, Treasury and Congress,” he says. Rosenberg sees gross domestic product stalling in the current quarter, growing at an annual rate of no more than 1 percent in the first three months of 2010 and no more than 2 percent for all of 2010.
The current economy won’t resemble previous V-shaped recoveries, he says. “It’s going to look like this whole string of lowercase Ws for the next five years,” with periods of growth followed by periods of contraction.
“The U.S. is going to be grappling with a consumer who’s going to be downsizing” for quite some time, says Rosenberg, a former economist at the Bank of Canada. The savings rate -- 3 percent in August, according to the Commerce Department -- will rise to 10 to 12 percent during the next few years, he predicts.
Even if there is a recovery under way, banks aren’t joining in, he notes. Lending has fallen for five consecutive months, with the Fed reporting $6.75 trillion of loans and leases outstanding to businesses and households as of Sept. 23, compared with a record $7.32 trillion in October 2008.
“The stock market is telling you there’s an all-clear signal,” Rosenberg says. “Why are banks not buying into that? If they were, they would be expanding their balance sheets.”
Kantor, head of research at Barclays Capital Inc. in New York, was one of the first economists to call the end of the recession, in March. Barclays sees GDP expanding at a 4 percent rate now, 5 percent in the first quarter and 3.6 percent for 2010.
“We think the recovery will be sustained,” Kantor says. “People talk about double-dips, the economy’s on life support and once it’s withdrawn everything is going to fall apart again. Business cycles typically don’t work that way.”
I believe Kantor and the ECRI are about to discover this is not the typical business cycle recession. This is a debt-based deflationary credit contraction recession similar to the Great Depression.
My bet is on Rosenberg or perhaps his bet is on me given that I proposed the "WW" scenario first. Time will tell.
Mike "Mish" Shedlock
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