ECRI's WLI Surges to Six Month High

ECRI's WLI and WLI Growth Rate Continue Higher

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 November 19, 2010

• WLI  is 126.4 up from the prior week's revised lower reading of 124.2.  (Last week we reported WLI was 124.3)  
• 126.4 marked a 6-month high for WLI. WLI was higher for the week ending May 14, 2010 at 127.0.
• 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 12th consecutive week to minus 3.1% from minus 4.5% 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 the Bureau of Economic Analysis announced they increased their estimate of Q3 GDP from 2.0% to 2.5%.  They kept their estimate for Q2 GDP at 1.7%.  My charts below reflect this revision.

Given the higher GDP estimates with surging WLI numbers, it appears that ECRI's October proclamation  "The much-feared double-dip recession is not going to happen" is on track.

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 

Note that the chart above of the S&P500 vs. WLI shows a breakout above the dashed green line that represents the neckline for a "Head and Shoulders Bottom" pattern.  This is a very bullish development.  A correction to test the pattern from above with a bounce to a higher high would be even more bullish, but not necessary for a continued market advance.

Chart of WLI from 1973 to 2010

 Chart courtesy of ECRI

Notes: 

1. The WLI for the week ending 11/26/10 will be released on 12/3/10
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:

• Oct 28, 2010 "The much-feared double-dip recession is not going to happen"
• Oct. 28, 2010 ECRI Warns of High Inflation Nightmare From QE2
• Sept. 24, 2010 ECRI - Premature to Predict New Recession
• July 01, 2010 ECRI Weekly Leading Indicators Widely Misunderstood
• Dec. 04, 2009: ECRI Warns of Lasting High Unemployment Despite Economic Recovery
• July 31, 2009: ECRI Predicts End of Home Price Downturn
• July 21, 2009:  ECRI Predicts The End of the Recession is Imminent
• April 3, 2009: ECRI Says US Business Cycle Recovery Ahead
• March 28, 2008: ECRI Calls it "A Recession of Choice"