A comment on the ECRI leading indicator

This chart shows the Economic Cycle Research Institute's Weekly Leading Indicator. The pronounced drop in the index which began in early May has been the subject of much concern, since some have taken it to imply the imminent onset of a double-dip recession. Business Insider has a nice summary of the controversy here. The key point is that outsiders have misused or misunderstood this index: "ECRI itself has never used WLI growth going negative as as a recession signal." In short, the concerns are much ado about nothing. ECRI further explains that a decline in the WLI would have to be accompanied by a "pronounced, pervasive and persistent decline" in their Long Leading Index before they would predict the onset of a recession. While I have not seen the LLI, presumably it has not given such a signal yet. I think the main message of the current decline in the WLI is that economic growth going forward may be a bit weaker than it has been in the past several months, but that is not at all the same as saying we are headed for a double-dip recession.

I do not follow the ECRI indices religiously, but I do hold them in great respect, since in my experience their economic calls have tended to be similar to my own. I would be surprised if they were to predict a recession that was not obvious to me. They have a good record of predicting recessions and recoveries, and in fact, they predicted the current recovery in April '09, in advance of the consensus. I would note that I also predicted the recovery, but even earlier, in this post dated Dec. 31, '08.

I would reiterate here that I do not see any signs in the economic or financial market data that would lead me to expect a double-dip recession. I continue to believe, as I have since my 12/31/08 prediction, that we are in a recovery that will be sub-par "due to the drag of increased fiscal spending and slowly rising inflation." The economy would be growing much faster, in other words, if it weren't for all the so-called "stimulus" spending that has made the economy less efficient by redistributing nearly one trillion dollars from the productive sectors of the economy to the non-productive sectors. And if monetary policy weren't so accommodative and potentially inflationary, the economy would be stronger today because investors would have more confidence in the future and companies would be more willing to make productive (and risky) investments.