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Wednesday, August 04, 2010 3:02 PM


ECRI's Lakshman Achuthan Still Blowing Smoke


Lakshman Achuthan and Anirvan Banerji, co-founders of ECRI maintain the ECRI' WLI Weekly Leading Index (Still) Widely Misunderstood

I am going to cut to the chase because all Achuthan and Banerji did in that piece is blow smoke without addressing the critical issue. Here is the key paragraph.

It’s true enough, based on the four decades of publicly available data, that WLI growth has never dropped this far without a recession. What most don’t know – apart from the fact that the WLI growth rate shouldn’t be used to predict recessions in the first place – is that, based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below current readings, but no recessions resulted.
ECRI Still Has Explaining To Do

Lakshman Achuthan chastised Rosenberg in the above article (but not by name) for doing exactly what the ECRI did: Propose the WLI can be used to predict recessions.

I documented proof of that in ECRI Weekly Leading Indicators at Negative 9.8; Has the ECRI Blown Yet Another Recession Call?
Just The Facts Maam, Not The Spin

If the ECRI does not want people assuming the WLI can be used as a recession forecast, then perhaps they ought not present it that way.

Please consider some charts and text from the ECRI publication The Great Recession and Recovery
ECRI Weekly Leading Index



"This 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."

I need to repeat that, over this entire time period, I was present to see each of the correct recession and recoveries calls in real-time, without false signals in between.
ECRI Clearly Touts the WLI's Recession Prediction Capabilities

Please read the preceeding two paragraphs in italics slowly and carefully.

Lakshman Achuthan and Anirvan Banerji defense of the ECRI is that the WLI cannot be used to predict recession, yet in a blatant attempt to promote the WLI, the ECRI did just that!

Supposedly the WLI in "real-time" has correctly predicted every recession without a single false signal. Quite frankly that was a blatant attempt by the ECRI to promote the WLI's recession prediction ability.

Now the ECRI is caught. They touted the WLI in a blatantly misleading manner. Worse yet, they even took their own statements out of context to do so.

Flashback November 2007 ECRI Vol. XII, No. 11: Weakness In Leading Indicators Not Yet Recessionary

Please consider the following image snip. Highlighting is mine.



In November of 2007 the ECRI was bragging it did not forecast a recession "despite an inverted yield curve, which many economists have long considered to be the best predictor of a recession"

In contrast note the spin from The Great Recession and Recovery.



Accompanying that slide the ECRI said "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.

Blowing Smoke or Outright Lie?

Just about now inquiring minds ought to be asking if the ECRI is blowing smoke or telling blatant lies?

I will leave that to the reader to decide.

My objection is not that the WLI is useless, my objection is that Lakshman Achuthan and Anirvan Banerji are speaking out of both sides of their mouths by promoting the WLI's ability to do what they say it cannot.

The recent article on the Big Picture does not address these issues. At best, it blows smoke.

Addendum - Email Comment From Janet Tavakoli:

Here is a comment from Janet Tavakoli who sent me the link to the article that I responded to above.
Hello Mish

I’d much prefer if ECRI would just present its data, its view in real time of what it means, and if it has to later change its viewpoint on what the data means, then do so and mention the earlier viewpoint to give context. We all learn from that kind of thought process. I’d still like to see the data , but now the commentary they provide for it has to be discounted. It’s a real blow to their credibility, and it’s a shame.

Everyone has been thrown off balance by governments and central banks intervening, doctored data, and more. We are all looking for people to trust, whether they get the interpretation right or wrong in the moment.

Best,

Janet
Thanks Janet!

The bare minimum the ECRI can do is

1. Stop promoting the WLI for uses it says are invalid
2. Apologize for their incorrect statements and usage of the WLI to promote the ECRI

Moreover, as Janet suggests, the best approach would be for the ECRI to actually publish the makeup of the index and let people draw their own conclusions. With the ECRI revising their own comments, blatantly out of context, they have indeed lost credibility.

Blowing smoke will not restore that credibility.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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