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Friday, October 29, 2010

ECRI's WLI Growth Rate - No Double Dip Recession

ECRI's WLI and its WLI Growth Rate Up Again.  ECRI says the US Economy will Avoid a Double Dip Recession
The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released their latest readings for their proprietary Weekly Leading Index (WLI) this morning. (More about ECRI
For the week ending October 22, 2010
  • WLI  is 123.1, up from the prior week's revised reading of 122.0.  
  • The lowest reading for WLI this year was 120.4 for the week ending July 16.
  • Since apparently bottoming at -10.3 for the week of August 27,  WLI growth moved higher or was flat for the eighth consecutive week to minus 6.5% from minus 6.9% a week ago.  
  • The last positive reading for WLI growth was for the week ending May 28, 2010 when it stood at positive 0.1%. 
Yesterday  ECRI said  "The much-feared double-dip recession is not going to happen. That is the message from leading business cycle indicators, which are unmistakably veering away from the recession track, following the patterns seen in post-World War II slowdowns that didn't lead to recession.After completing an exhaustive review of key drivers of the business cycle, ranging from credit to inventories and measures of labor market conditions, we can forecast with confidence that the economy will avoid a double dip.

Note my chart for today shows the first estimate of Q3 GDP growth of 2.0%.  Q2 GDP was unchanged at 1.7%. Once again, ECRI scores a direct hit with WLI and WLI growth stabilizing before it was announced GDP was stable. 
Chart of WLI and WLI growth vs GDP Growth
 
click to view full size charts
Since ECRI releases their WLI numbers for the prior week and the stock market is known in real time, you can often get a clue for next week's WLI from the weekly change in the stock market.

Chart of S&P500 vs ECRI's WLI 
Chart of WLI from 1973 to 2010
 Chart courtesy of ECRI
Notes: 
  1. The WLI for the week ending 10/29/10 will be released on 11/5/10.
  2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
  3. ECRI uses the WLI level and WLI growth rate to HELP predict turns in the business cycle and growth rate cycle respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. 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 negative ten, but no recessions resulted (although there were clear growth slowdowns).
Disclosure:  I am long the exchange traded fund for the S&P500, SPY charts and quote, in my personal account and in the "Explore Portfolio" in  "Kirk Lindstrom's Investment Letter."

KEY ECRI Articles:

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