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Friday, September 30, 2011 6:52 PM

ECRI Calls Recession Based on "Contagion in Forward Indicators"; Just How Timely is the Call?

Mish Moved to MishTalk.Com Click to Visit.

A number of people have asked me to comment on the ECRI's recession calls.

Link if video does not play: Economist Says U.S. Recession Is `Inescapable'

Tom Keen: "Single Sentence, why recession now"
ECRI's Lakshman Achuthan: "Contagion in Forward-Looking Indicators"

Select Quotes from the Video

  • "We are looking at forward looking indicators, over a dozen leading indicators on different aspects of the US economy, and it's wildfire"
  • "Anyone who is looking for a job has a right to call this a depression"
  • "It's going to get worse"
  • "Spain never left recession, I don't care what the GDP numbers say. Italy's on the verge, and the [European] core is not looking so good."
  • "Dr. Copper is a short-term leading indicator. This thing has room to run. Global industrial growth is not turning up anytime soon"
  • "Government bond yields can go even lower. Look at Japan"
  • "Future inflation gauge for Europe is heading down"

Superb Interview

I have to give Achuthan credit. I think that was a superb interview. However, I still do not appreciate the half-truths and hype in today's ECRI report U.S. Economy Tipping into Recession
Last year, amid the double-dip hysteria, we definitively ruled out an imminent recession based on leading indexes that began to turn up before QE2 was announced. Today, the key is that cyclical weakness is spreading widely from economic indicator to indicator in a telltale recessionary fashion.

Why should ECRI’s recession call be heeded? Perhaps because, as The Economist has noted, we’ve correctly called three recessions without any false alarms in-between. In contrast, most of those who’ve accurately predicted a recession or two have also been guilty of crying wolf – in 2010, 2005, 2003, 1998, 1995, or 1987.
A Look at ECRI's Recession Predicting Track Record

The ECRI does not call recessions in advance. Perhaps they caught this one, but we will have to wait and see. I suspect the NBER will date this recession back to June or July and if so the ECRI will be about a quarter late.

More importantly the ECRI totally blew the the recession that began in 2007, as well as the strength of it.

As long as the ECRI persists in its false claims, I will persist that people take a look at ECRI's recession predicting track record.

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

Please consider the following image snip. Highlighting is mine.

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."

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. ....

This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.

ECRI Denial

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.

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.

Marketing Spin

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.

Compare that slide, with the above image snip above.

The ECRI was clearly bragging not only about besting the yield curve, but also said "The Difference this time is that, even though the shocks have arrived, good leading indexes like USLLI are not showing recessionary weakness. ... as Chart 1 shows, the level of the USLLI is already a little lower now than it was three months earlier. However, this weakness is not pronounced, pervasive and persistent enough to be recessionary"

It's Different This Time!

After the fact, the ECRI took one statement out of context, a statement they went to great lengths to refute, then has the blatant gall to claim they issued a "recession warning".

Recessions Predicted in Arrears

Once again, I think Lakshman Achuthan did an excellent job in the interview. He stated the recession case well.

However, the ECRI has a history of waiting until a recession is baked in the cake, then proclaiming it before the NBER and calling it a success.

The revisionist history in regards to "no misses" is plain to see. The ECRI totally blew the call in 2007 and early 2008. That is not the galling part. Calls are easy to miss. The galling part is the ECRI's revisionist history related to the blown call.

The ECRI's integrity will remain in question as long as it continues to perpetuate the myth of a perfect record. The simple fact of the matter is no one has a perfect track record at calling recessions, interest rates, the stock market or anything else.

Mike "Mish" Shedlock
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