ECRI Recession Watch: Weekly Update

For a long time, nearly four decades, growth has been getting progressively weaker during each recovery from recession. Of course, the U.S. is a major contributor to world trade and QE, but its trend of weaker growth is present in all major developed economies.

There are two key drivers behind this declining trend: demographics and lower productivity growth. Yes, it's true that we've seen pretty good U.S. jobs growth recently, but that comes with productivity growth slamming down to zero. 

The release on March 18th of the latest Federal Reserve economic projections, lowered from their previous projections, reinforces ECRI's stance.

The ECRI Indicator Year-over-Year

Below is a chart of ECRI's smoothed year-over-year percent change since 2000 of their weekly leading index.

Appendix: A Closer Look at the ECRI Index

The first chart below shows the history of the Weekly Leading Index and highlights its current level.

For a better understanding of the relationship of the WLI level to recessions, the next chart shows the data series in terms of the percent off the previous peak. In other words, a new weekly high registers at 100%, with subsequent declines plotted accordingly.

As the chart above illustrates, only once has a recession ended without the index level achieving a new high -- the two recessions, commonly referred to as a "double-dip," in the early 1980s. Our current level is still off the most recent high, which was set back in June of 2007. We've exceeded the previously longest stretch between highs, which was from February 1973 to April 1978. But the index level rose steadily from the trough at the end of the 1973-1975 recession to reach its new high in 1978. The pattern in ECRI's indictor is quite different, and this has no doubt been a key factor in their business cycle analysis.

The WLIg Metric

The best known of ECRI's indexes is their growth calculation on the WLI. For a close look at this index in recent months, here's a snapshot of the data since 2000.

Now let's step back and examine the complete series available to the public, which dates from 1967. ECRI's WLIg metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP and recessions.

The History of ECRI's 2011 Recession Call

ECRI's weekly leading index has become a major focus and source of controversy ever since September 30, 2011, when ECRI publicly announced that the U.S. is tipping into a recession, a call the Institute had announced to its private clients on September 21st. Here is an excerpt from the announcement:

Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there's nothing that policy makers can do to head it off.

ECRI's recession call isn't based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down — before the Arab Spring and Japanese earthquake — to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not "soft landings." (Read the report here.) 

Year-over-Year Growth in the WLI

Triggered by another ECRI commentary, Why Our Recession Call Stands, here is a snapshot of the year-over-year growth of the WLI rather than ECRI's previously favored method of calculating the WLIg series from the underlying WLI (see the endnote below). Specifically the chart immediately below is the year-over-year change in the 4-week moving average of the WLI. The red dots highlight the YoY value for the month when recessions began.

The WLI YoY is in the negative zone, now at -1.2% and off its interim low of -2.3% set in mid-January. The latest level is lower than the outset of four of the seven recessions during ECRI's published data series. This indicator has only rarely dipped below its recent interim low outside recessionary periods: Lower levels occurred in 1988 and also during the economic volatility following the last recession.

Weak US Economy but Not in Recession

At some point ECRI backed off its claim of a US recession in the late 2011 to early 2013 time frame, although the company has not made a public statement acknowledging its error. For example, in a mid-November Al Jazeera America interview Lakshman Achuthan reiterated the US economy is weak but dismissed the idea that it is headed toward recession.