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Friday, March 29, 2024

ECRI Weekly Leading Index: WLI Unchanged, Growth Index Highest Since May 2013

Courtesy of Doug Short’s Advisor Perspectives.

Today’s release of the publicly available data from ECRI (Economic Cycle Research Institute) puts its Weekly Leading Index (WLI) at 136.4, unchanged from the previous week. Year-over-year the four-week moving average of the indicator is now at 2.11%, up from 2.08% the previous week and the fourteenth week in positive territory. The company’s Weekly Leading Index annualized growth indicator (WLIg) is at 7.2, up from last week and its highest since early May of 2013.

“Cyclical Misconceptions Driving Policy Errors”

ECRI’s latest feature article is an excerpt from a recent working paper that claims policy makers are unable to distinguish between structural and cyclical forces. According to ECRI, only policies that address the productivity and demographic issues can sucees. Read the full article here.

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. The latest level is above where it was at the start of the last recession.

WLI since 2000

RecessionAlert has launched an alternative to ECRI’s WLIg, the Weekly Leading Economic Indicator (WLEI), which uses 50 different time series from various categories, including the Corporate Bond Composite, Treasury Bond Composite, Stock Market Composite, Labor Market Composite, and Credit Market Composite. An interesting point to notice — back in 2011, ECRI made an erroneous recession call, while the WLEI did not trigger such a premature call. However, both indicators are now generally in agreement and moving in the same direction.

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.

WLI Complete Series

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.

WLI Percent off Peak

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.

WLI Growth 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.

WLI Growth since 1965

Year-over-Year Growth in the WLI

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.

WLI Year-over-Year

The WLI YoY has been in positive territory for the thirteenth cosecutive week and is now at 2.11% to two decimal points, up from 2.08% last week. The latest level is lower than at the start of one of the last seven recessions. 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.

Note: How to Calculate the Growth series from the Weekly Leading Index

ECRI’s weekly Excel spreadsheet includes the WLI and the Growth series, but the latter is a series of values without the underlying calculations. After a collaborative effort by Franz Lischka, Georg Vrba, Dwaine van Vuuren and Kishor Bhatia to model the calculation, Georg discovered the actual formula in a 1999 article published by Anirvan Banerji, the Chief Research Officer at ECRI: ” The three Ps: simple tools for monitoring economic cycles – pronounced, pervasive and persistent economic indicators.”

Here is the formula:

“MA1” = 4 week moving average of the WLI

“MA2” = moving average of MA1 over the preceding 52 weeks

“n”= 52/26.5

“m”= 100

WLIg = [m*(MA1/MA2)^n] – m

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