“3. Our indexes are not significantly impacted by the “juicing up” of the books or the unusual accounting changes that have occurred recently.”

You say NOT significantly impacted but in your charts above, and in pdf file referenced by Owen b above, http://www.ritholtz.com/blog/2009/07/synchronized-surge-strengthens-since-april/#comment-194727 many charts used are seeming to make comparisons to “Stock Prices.” You are using “Stock Prices” in a deliberately vague manner (touch aloof) but when making comparisons to “Stock Prices,” it is implied you mean financials to some extent.

Based on this comparison to “Stock Prices,” financials (many property and Casualty Insurance firms in there with Specialty/Diversified/Mortgage REITS, asset management firms, investment services firms, Retail/Industrial/Office REITS, Reinsurance/Life insurance firms, blended with banks regional and those most favored of N.Y. Fed Governors who might like to make accounting changes when it is opportune, similar to a mob boss from the streets of N.Y. or any hoodlum for that matter)… financials… might today make up 9-18 percent weighting of “Stock Prices” in general terms. In view of this, do you mean to say that a) your membership does not count the above group as significant, or that b) the indexes your membership maintain and are using to compare other indexes to, 9-15 percent of our everyday economic markets are not considered significant by members?

Enough to include an asterisks, responsibly to denote some steroid-like doping has occurred in one sector, whereas, in prior recessions, our Presidents, Secretary of Treasury personnel, nor United States Fed Reserve agents, acted in such dishonorable ways. For example, dishonorable leadership, might act to take debt obligations a firm’s talented executives have signed the firm to be liable for, and instead of servicing that debt responsibly, put that debt on accidental tourists when they happen by, or seek to enlist the Treasury of the United States in a non-traditional role, as the debt maintenance firm for large banks of NY, and then in pattern behavior, make material changes in accounting methods, prior to paying large bonus to bank executives who have proven to be, incompetent, in managing their own debt obligations. (Note large bonuses in following pattern behavior, which is generally considered dishonorable when a mob syndicate does it, especially when the company was not profitable or when that money was earned via benefit of receiving cash infusions, that such firms, historically, were not the beneficiary of. Dishonor).

[Side note: Then in following such an example, we might also like our military leaders to indulge themselves to reward, dishonor, with bonuses, accolades and medals?]

Where dishonorable pattern behavior is true, this might concern some of the members of your group, enough to mention such practices are unprecedented, and have never occurred before in U.S. History. Because if a group of economists are too aloof to mention how detrimental such dishonorable practices are to economic principals in general, then who can the common American count on, to mention that, to fools at the FEDERAL RESERVE and FDIC, who think debt evading asshole bankers, merit any more bonus than a turkey, in following such pattern-behavior, which are the epitome of irresponsibility and voodoo economics.

I wonder if you have any mature economists in your membership, who might see such practices as morally or economically flawed, such that when persons act like this, shouldn’t economists be signing a letter to the President and sending copy to the Attorney General of the United States, that something is wrong with the behaviors we have just observed (as opposed to trying to wax widely around “STOCK PRICES” index)?

Seriously, your members do not see any pattern behavior that merits, coming together as economist or professional members and asking other top level economist to sign letter to the President, saying things have been done wrongly and forensic accounting is warranted at this stage?

Again, thank you for your kind regards. I return same. Please pardon my asterisk, above. I cannot however, thank you for being so objective in monitoring your leading indexes, that you have narrowed your focus on the indexes alone, and seem no longer able to see beyond that narrow focus, based on gut feel, bolstered by any seemingly plausible argument that the pattern-behavior of those regulating what happened in the last 8 months, is the worst kind of economics. The worst Sir.

If you are truly a top economist and your members genuine in professional aptitude, you have a duty to re-fortify yourselves and help Americans bring forth better reckoning. That it preserve decorum in our society, if for no other reason.

Cordially, Chris Bruer

Thanks for your comments. I’ll try to address the issues you raise.

1. Please know that ECRI is an independent institute almost entirely funded by professional members. We are not beholden to any member or group of members.

2. We objectively monitor our leading indexes, always vigilant about any developments that could possibly trip them up. For example, in the early 1990s we had to adjust our industrial commodity index because mandatory recycling combined with the recession drove the price of old corrugated boxes negative for an extended period. As a result we had to make some changes to the index, but having said that such changes are rarely warranted.

3. Our indexes are not significantly impacted by the “juicing up” of the books or the unusual accounting changes that have occurred recently.

In the many decades that we’ve been monitoring the business cycle in dozens of countries our leading indexes have encountered a slew of market disturbing forces, and continued to work properly.

The point to understand is that these kinds of issues don’t have a significant impact on the timing of the turn in the cycle, and that is the key strength of our leading indicator approach.

I hope this is helpful.

Kind regards,
Lakshman

I have this question about irresponsibility in reporting financial news, not as it pertains to you, but to the networks and high profile firms, in general, preparing reports to the client, using charts and comparing past recessions.

Comes into view fiduciary responsibility. If you feel moved to reply by all means please be welcome. This is a think tank, but please do not feel obligated on my behalf. Think of others, far removed, if you like to reply. Again, to fiduciary responsibility as a concept from a professional level. Here we are talking about the concept of a higher standard of conduct, however trivialized it might be by some professionals, and considered important or extremely important by others (this might include supervisors or overseers of the professional conduct, or a board of directors at a financial firm, when it comes to fiduciary duty, work product and responsibility of the company’s agents.

Notice, not too many financial firms are writing in the subject these days. So then, let us temporarily, look that way and have discussion if you are open to it.

Comes into view again, fiduciary responsibility:

Shouldn’t there be a steroid-type asterisk on all these reports, (or periodic reminder on network reporting) that financials sort of juiced the books, by evading their debts, receiving injections, and also, making changes in accounting that are NOT generally considered legal, …so that going forward, it is not really a fair comparison with other sectors in our market or with past recessions (when making a change in accounting was NOT done)?

Do you remember sale prices from last year?
December Christmas sales prices?
Deep discounts?

How can companies really grow their merchandise sales in such a climate? How many manufactures? Growth economies often have improved sales on luxury or big ticket items to achieve a measure of growth over prior years. Such was virtually non-existent in 2008, as we and even our wealthy friends cut back on spending.

We might want to start asking people what they think, if this Christmas they will spend more or less than last year? In the broader country, I tend to think you will get more responses, that people are planning to spend less. If you took the informal survey this summer outside nightclub lines, this fall at Sunday brunches, or in November standing in shopping malls, I think you will probably get the same answer. Across all socio-economic classes, people will probably say they plan to spend less this year than last.

If true, companies are going to have to cut prices even more than last Christmas. This could result in more commercial store closings. Another wave of corporate cutbacks.

I do not think the market has factored that far ahead.
Same for these peculiarly named indexes.

-=-=-=-

cvienne says a similar idea, but added the ARM reset into the picture.
http://www.ritholtz.com/blog/2009/07/synchronized-surge-strengthens-since-april/#comment-194724 Tie in real estate to this ECRI report, and add that asterisk about accounting gimmicks, and no one being called in to say who is taking the steroids or to denounce even the use of steroids in the banking industry, and the report is flawed right there.

*U.S. Code, Title 12, Chapter 16, § 1831o Prompt Corrective Action (i)(1) and (i)(2)(D) restrict the activities of any critically undercapitalized insured depository institution; and at a minimum (emphasis added), prohibit any such institution from doing any of the following: Making any material change in accounting methods.

Best of luck.

Hi David,

I appreciate your question, but the components of our indexes are proprietary. Nevertheless, the key reason our leading indexes work is not because of some special component(s) that we have, but rather because of what they illustrate when the three P’s are observed.

In this case we’re seeing a pronounced, persistent and, perhaps to your point, a quite pervasive rise in the number of components contributing to the rise. For example, in the Long Leading Index it’s not just easy money that is driving it up, and in the shorter leading indexes it’s not simply the stock market, or ISM (which in fact isn’t included).

I hope this helps to address some of your concerns.

Kind regards,
Lakshman

Hi Mark,

Thanks for your question about the U.S. Long Leading Index (USLLI) after the last recovery began.

After correctly navigating the 2001 recession in real-time, USLLI growth peaked in January of 2002 and did not bottom again until March of 2003.

By the way, I’m not an economist (and ECRI doesn’t use econometric models for forecasting the cycle) but I do know something about business cycles. Every depression consists of one or more very deep recessions. You can see for yourself on the NBER website here: http://www.nber.org/cycles/

Kind regards,
Lakshman