Mish vs ECRI vs Krugman
Here’s yet another interesting debate between a coupla bright guys: Mish vs ECRI vs Krugman.
• It began with Mish challenging ECRI’s claims of forecasting the recession.
• Krugman points out that “in a zero-interest rate world — the three-month rate was .066% last I looked — especially one that’s suffered from a collapse of the shadow banking system, conventional indicators don’t mean what they usually mean.”
• ECRI responds with a look at their track record.
As we have tirelessly pointed out, there is no indicator that is failsafe. Things that work on occassion sometimes stop working.
I have found ECRI to be of value to me in my own investing and trading. That does not mean they are flawless or a guarantee — just that they have had value to me.
While Mish and Laksman debate their respective track records — Mish is correct in noting that ECRI wasn’t aggressive enough in predicting this recession, and ECRI could point out that MISH failed to see the recovery (or at least the 60+% market rally).
Traders and Investors should always be looking for the most interesting lesson to be gleaned. In this case, it comes from the Nobel laurelate: There are times when conditions vary so much from prior circumstances that usual metrics are no longer reliable.
Advantage Krugman.
October 14th, 2009 at 11:23 am
BR – that’s a fair overall assessment and scoring, imho. But to your central point – no indicator set is perfect and you need to know what they’re based on and how they’re constructed. Remember regression analysis was created by Gauss to filter out the noise in survey data when the Duchy of News Brunswick was being re-mapped. In this case Mish missed the bear rally (there I think your assessment is more accurate) but ECRI’s indicators are based on statistical relationships that have two major problems. One – the relationships are basically post-WW2 estimates and we’re in a different regime now (as Paul points out). Two – they’re heavily dependent on monetary and market indicators, which goes back to where ECRI inherited (& doesn’t appear to have re-considered) it’s founding work from – Geoffrey Moore at and of Columbia. In the world we’re currently in with huge injections of liquidity but collapsing money velocity and highly restricted credit because of continued economic weakness plus broken business models in the Finance industry monetary indicators are problematic. And Mish makes a point about markets being coincident indicators which my own investigations confirm over the last four years, going back to 1950 or farther (a point Ellis also makes). On the other hand it is possible to do the investigation – the fundamental analysis as Krugman calls for – and get it reasonably right. For example there are a lot of shibboleths floating around right now on the outlook, the $, trade deficits, etc. that are based on that old world and don’t look at the deep changes in trade patterns, savings and consumption:
http://llinlithgow.com/bizzX/2009/10/from_mythologies_to_realities.html
Blindly following along is indeed dangerous and 98% of the talking head and MSM headlines will get you killed (as you’ve proven over and over again).
October 14th, 2009 at 11:33 am
ECRI missed the 2008 recession. Now their reasoning goes like this: Since their predictions can’t be wrong, reality must be wrong.
They also are saying they predicted in April 2009 that the recession will end in summer 2009 and they claim to have been correct with this call. How do they know they have been correct? Because they predicted it? As far as I know NBER hasn’t determined the end of the recession. Now, maybe the recession has technically ended in summer. But the numbers that would confirm this haven’t been released yet.
As for the alleged great track record of ECRI. I don’t believe any claim by Achuthan regarding this before I have seen the actual data and method of comparison, which prove this claim to be correct. I think this guy is quite a spin master. They want to sell their product.
rc
October 14th, 2009 at 11:34 am
“Blood on the streets” has been a fairly good indicator. It worked this, last time.
October 14th, 2009 at 11:35 am
coupla bright guys?
you noted three folks…
krugman is a broken clock and has been wrong so many times I lost count. he won his prize for the same reason obama did – liberal panelists who hate bush.
mish is a small time money manager who has also been wrong many times.
~~~
BR: Professor Krugman, who has been teaching at Princeton for years, won the Nobel for his well regarded work on Global Trade. Speak to most economists and they will tell you his Nobel was earned.
Mish has had some very insightful commentary over the years.
For an anonymous blog commenter, you really talk some trash.
October 14th, 2009 at 11:42 am
Its different this time.
October 14th, 2009 at 11:43 am
I think the differentiating point between Mish and ECRI would be the advent of inflation. As you state, the 60% retracement of stocks might or might not mean we are in full recovery, it could be 2000 again, or we may simply be in a faux recovery that cannot stand the withdrawal of government stimulus, since the consumer’s position has essentially only gotten worse since Sept. 2008. If a deflationary trend like Japan has/had is our ultimate outcome, I will vote Mish. If the government printing creates an inflationary bubble, I will opt for the ECRI bubbas….
October 14th, 2009 at 11:53 am
I was struck by the following when reading Mish’s post on this yesterday.
ECRI claims they forecast the current recession in 2007 by stating the following
“The magnitude of oil and interest rate shocks are near recessionary readings.”
When you read the entire statement they released it reads
“The difference this time is that even though the shocks have arrived, good leading indexes like the USLLI are not yet showing recessionary weakness”
As far as I’m concerned, the claim that ECRI correctly forecast this recession is a bald faced lie. They have simply done what most economists and forecasting group always does. They very carefully word their statements so that they can pull quotes that suggest they knew what was coming.
October 14th, 2009 at 11:56 am
BR,
You probably scored this one right, I’m sure you keep Paul’s comments in mind when making your 70’s comparisons.
As for Mish missing it, well what does that even mean? The absolute return fund shows a 17.3% ror through the end of q2 on his site. It was up 6.9% last year. Why did it matter if he missed the rally with those numbers? I would also side with Mish that there hasn’t actually been an economic recovery, at least not yet, as you point out above, just a stock market rally.
October 14th, 2009 at 12:00 pm
“BR: Professor Krugman, who has been teaching at Princeton for years, won the Nobel for his well regarded work on Global Trade. Speak to most economists and they will tell you his Nobel was earned”
So you make references to Obama’s winning a Nobel as an April Fools joke yet you object when someone makes a similar argument about Krugman?
Nice
October 14th, 2009 at 12:01 pm
@BR
“Professor Krugman, who has been teaching at Princeton for years, won the Nobel for his well regarded work on Global Trade. Speak to most economists and they will tell you his Nobel was earned.”
—
With all due respect BR… Ben Bernanke was also teaching at Princeton for many years… It remains to be seen what “rescue” or “potential harm” his actions are doing to the world economy at present…
As for Economists… Put 10 of them in the room together and you get 12 answers to a problem… So I cast a wary eye any “consensus” coming from ECONOMISTS…
Understand that I’m not disagreeing with you with regards to Krugman, I’d like to hear a better argument in his defense… Not a “Wanger-esque” summary.
October 14th, 2009 at 12:16 pm
Barry, thanks for covering this.
You give Krugman the “advantage” because of his statement that “There are times when conditions vary so much from prior circumstances that usual metrics are no longer reliable.” In other words, he’s claiming that it’s different this time. At ECRI, we have done the research to be able to assert that he’s mistaken on this point — in fact, the essence of our research over many decades has been to determine when our leading indicators could break down, and the current conditions simply don’t fit the bill.
Let me move on to the related comments from dblwyo, ” ECRI’s indicators are based on statistical relationships that have two major problems. One – the relationships are basically post-WW2 estimates and we’re in a different regime now… Two, they’re heavily dependent on monetary and market indicators.”
These are very common misconceptions that I am happy to have the opportunity to correct. First, ECRI’s indicators are NOT based on regression analysis in any way, sense or form. Nor are they based on any standard “statistical relationships,” because such measures are quite inappropriate for evaluating leading indicators.
Let me also be very clear about another point. Contrary to widespread allegations, ECRI’s leading indexes are not back-fitted to post-World War II data. Rather, our leading indexes are rooted in insights from pre-World War II (in fact also pre World War I) depressions, panics and crises. Some of our leading indexes actually go back more than a century.
Finally, ECRI’s leading indexes are NOT heavily dependent on monetary and market indicators. This is simply what many pessimists would prefer to believe, but is very far from the truth.
If anyone is seriously interested in the details of our work, rather than parroting the same mistaken critiques, please examine the links in our response to Krugman above, including the IMF seminar on our approach to forecasting the economy’s turning points.
October 14th, 2009 at 12:27 pm
My astrologer can out-predict your clairvoyant any day of the week (at least, that’s what the bumps on their heads indicate).
October 14th, 2009 at 12:31 pm
Bruce said:
“…or we may simply be in a faux recovery that cannot stand the withdrawal of government stimulus, since the consumer’s position has essentially only gotten worse since Sept. 2008.”
Damned straight.
I like the way Hussman puts it:
“My view continues to be that the intrinsic condition of the U.S. economy has not improved, and that the green shoots we’ve observed are a transient artifact of green dollars poured out by the government.”
Or to paraphrase Tipp O’neal commenting on the early 80’s economic recovery in the wake of Reagan’s massive deficit spending:
“I too could show you a good time if you let me write trillions in hot checks.”
October 14th, 2009 at 12:42 pm
OK perhaps Krugman has done fine economic work.
But I have to agree with GetALife that he likely won the Nobel not because of his economic work but because of his incessant Bush-hate attacks in the NYT.
I personally wonder how anyone can be the best in their profession when their work is so strongly influenced by emotion rather than judgment. JMHO.
October 14th, 2009 at 12:56 pm
“Traders and Investors should always be looking for the most interesting lesson to be gleaned.”–BR, above
that’s a fine point, too often, missed by, too, many.
~~
bsneath,
w/this: “I personally wonder how anyone can be the best in their profession when their work is so strongly influenced by emotion rather than judgment. ”
You’re right to wonder, emotion, often, leads one astray.
October 14th, 2009 at 1:00 pm
fyi .. heads up @ IVAC (ILValleyAreaChamber) monthly breakfast this am
to hear UBS (Chicago) present “Financial Crisis & Finding our way again”
We went through a history of the last 10 years, touching on stimulus bills and healthcare.
At q&a mentioned, I hear all the time, “I can’t retire, I’ve gotta stay working for the insurance”. I asked his opinion if a health care bill passes, that allows 60somethings the feeling of security, insurance costs would be contained, and risk of being dropped removed, if 60somethings would begin retiring, and what they at UBS think would happen on withdrawals of cash of the 60somethings to live with, instead of the continue paying into the systems? I went on with a secondary note, the increased activity in jobs opening up for the under 60 crowd and new investments from them.
In general his answer stayed on message, a statement that folks are now living longer, near 100 years of age and that
a good solid retirement income would be as pertinent then as now and that folks will need to work longer because of the 100 year life expectancy.
We had some other exchanges about investing in foreign bonds and some local factory purchases from abroad and closings. I used the “we’re shooting our own foot” and his comeback UBS is talking personal income growth.
October 14th, 2009 at 1:02 pm
Anirvan Banerji,
Too what degree are the change in private or total debt levels in the economy taken into account to determine ECRI’s economic indicators? I remember to have read somewhere ECRI’s leading indicator didn’t work well for the Great Depression.
Are the data and the methodology on which the claims on ECRI’s track record are based published in any peer-reviewed journal and available to be independently reproduced and evaluated? Like it is done with any results from true scientific research?
rc
October 14th, 2009 at 1:10 pm
Everything is up from here INTC came in strong! I just bought a million-gazzillion shares…how can I go wrong they don’t have any off-balance-sheet issues? Even if they do they’ll just send them to the Cemetery. RIP, is what keeps this economy (market) standing.
October 14th, 2009 at 1:18 pm
Thor – I didn’t remember the entry as you stated it – went to find it – soooo
Is Today April Fools Day? By Barry Ritholtz – October 9th, 2009
First the Obama Peace Prize, now this headline: Saudis ask for aid if world cuts dependence on oil
October 14th, 2009 at 1:47 pm
“So you make references to Obama’s winning a Nobel as an April Fools joke yet you object when someone makes a similar argument about Krugman?”
The difference is that when he was not busy attacking George Bush in print, Krugman managed to accomplish a few other things over the years to earn a Nobel Prize. What has Obama done in his 8 and a half months in office?
Obama has been awarded the Nobel Not George Bush Prize. He should have had the guts to turn it down, but he didn’t.
And I’m saying that as someone who kinda sorta likes Obama (though I think he’s turning out to be a weak character) and who hates George Bush. In fact, I hated George Bush before it was cool to hate George Bush.
Of course, there is the question of whether any economist has ever done anything that deserves a Nobel Prize. In a more honest world the Nobel Prize in economics would not exist.
October 14th, 2009 at 1:56 pm
rc:
If you really want the answer, here it is, but it’ll require a minute to read through carefully.
In fact, ECRI’s leading indexes work very well in the Great Depression (and with no back-fitting of data), as well as in the 1920-21 depression and 1907-08 depression. The comment you picked up somewhere is a total distortion of a more nuanced observation I made at one point, that the 1929-33 recession was the only occasion when a growth rate cycle upturn within a recession was not followed in a matter of months by the end to recession. (During that 1930-31 growth rate cycle upturn, the Coincident Index growth rate surged from -16% to -6%, but then plunged again — as correctly anticipated by our leading indexes). In other words, our leading indexes would have worked just fine, in any case.
ECRI’s methodology has certainly been published in peer-reviewed journals. One comprehensive article (Banerji and Hiris) I would recommend was the lead article in the International Journal of Forecasting special issue on business cycles in 2001.
Any specific organization’s forecasting record is not something that such a peer-reviewed journal would normally publish, but The Economist magazine, after a thorough review of our track record, concluded that “ECRI is perhaps the only organisation to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm.” As you may be aware, The Economist is notoriously skeptical, and, as I can personally attest, very hard to satisfy.
October 14th, 2009 at 1:58 pm
Mish’s demolition of ECRI is complete and thorough. For them to come back and say he is sometimes wrong is playground argument… it is not a defense at all, it is merely name-calling. They have, it seems, made false statements about their past predictions.
October 14th, 2009 at 1:58 pm
Krugman is WAY overrated and he supported many of the decisions made in the 90s which eventually led to this crisis. His Nobel Prize was a rejection of Bushisms just as Obama’s was. ECRI is a very good service but these guys are slaves to their “indicators” which are highly correlated to mechanics which do not always portend a recovery. And, I remember clearly in 2008 that they were still hedging their bets until after the markets had already collapsed.
Mish is the only one worth listening to as it pertains to this cycle. He could eventually be wrong on some analyses because he is so focused on debt and his economics knowledge is often hazy and ideologically driven. But, who cares if he is a small time money manager as noted above. Seriously. Since when do we only listen to Harvard dumbasses that created this crisis? I thought in America we embraced merit. Mish deserves his kudos. ECRI is a decent service but not what they spout in their propaganda. Krugman? Well…….Show me something of substance that actually has merit in economic in anticipation of it happening and I’ll loosen up on him a little bit. But, he is way oooovvvvveeeeerrrrraaaattteeeeeeddddd.
October 14th, 2009 at 2:03 pm
I just read ECRI’s response, especially their link to their prediction of the 2009 recovery. Buried deep in the 2009 recovery paper was a one-sentence mention of stimulus spending. In passing. One sentence.
I looked in vain for any mention of the flood of government debt that is injecting a tsunami of liquidity, driving up equity prices. I looked in vain for any mention of the idea that the fundamentals of the economy are on life support and may collapse when that life support starts to be withdrawn.
I looked in vain for any mention of reality in the ECRI’s response. They are right about the recent direction of the stock market, but it seems like dumb luck, since they resolutely look away from some of the most important underlying reasons for its rise.
In fact, ECRI sound as if they are channeling Alan Greenspan’s recent fatuous remarks about the wonderful rising equity markets, while ignoring the government money causing the rise.
Advantage Mish, but being right about reality doesn’t always translate into being right about the market. It stays irrational longer than you can stay solvent.
“I too could show you a good time if you let me write trillions in hot checks.”
You said it, brother.
October 14th, 2009 at 2:19 pm
bdg123:
Even if you prefer to gloss over our January 2008 public statement that “a self-reinforcing downturn has already begun,” we made our public recession call in March 2008, which is on the public record (http://www.thestreet.com/story/10409927/1.html) at a time when the S&P 500 was well over 1300.
Of course, you can assert whatever you want, and claim, like many others, that ECRI made that recession call well after the markets had “collapsed.” It is just factually untrue, as the link above proves.
You obviously don’t understand how ECRI’s indicator systems work, but it isn’t based on correlations to any “mechanics” or regressions or data-fitting, no matter what Mish and his cohorts might assert. If you are really interested in the basis for our work, we’ve supplied plenty of links in our response to Krugman. I suspect that very few will bother to look at these, especially if they’ve already made up their minds about the economy.
October 14th, 2009 at 2:22 pm
I’ve never seen such a disconnect between my channel checks and the market. It doesn’t mean that the market isn’t right, but sales guys that are normally upbeat and tend to skew things to the upside are making contingency plans for surviving the next 5 yrs without a paycheck.
Recent comments: “It’s like the whole world has their head in the sand”, “things are getting worse and worse and worse out here” and “If you’re not selling to the gov’t, you’re not selling”
I cashed in my chips about 1000 pts ago on the Dow and I’ve had my puts stopped out twice so I’m back on the sideline until I can get some clarity.
October 14th, 2009 at 2:27 pm
Wally, I disagree. While Mish’s post may be compelling to someone who has not reviewed the record (see the ECRI reply to Krugman). Mish leaves out facts about when ECRI’s forecasts were made, and then makes up facts about ECRI’s leading indexes.
I just searched Mish’s site and found something interesting. Did you know that Mish felt fine using ECRI leading indexes when they agreed with his view? Here’s the link:
http://globaleconomicanalysis.blogspot.com/2008/10/leading-indicators-at-33-year-low.html
p.s. It does seem like you may be doing the name calling in your reaction to ECRI’s serious response to critics.
October 14th, 2009 at 2:32 pm
Apparently, you don’t understand how it works either as Mish has pointed out. There’s enough himming and hawing in ECRI’s analysis to hedge your bets either way. But as you so clearly point out, I have no idea what’s going on so you keep on keeping on.
October 14th, 2009 at 2:53 pm
Anirvan Banerji,
Thanks for the reply and the reference. I have been able to locate the paper to which you referred. Of course, I can’t say anything about it yet, right now.
So, is the recession that started in December 2007 the only one you have missed to predict so far? ECRI missed it, since Lakshman Achuthan had still stated in January 2008 that there wasn’t a recession, although the recession was acknowledged by him in March 2008. Perhaps, it has to do something with the debt levels in the economy. I see you have skipped my question with respect to what degree the change in private or total debt in the economy is being taken into account by the ECRI to predict economic growth.
I found it striking that Lakshman Achuthan, at least according to Reuters, plainly dismissed any fears regarding “debt laden consumers”:
“Last week, ECRI Managing Director Lakshman Achuthan told Reuters that the group expects an “unstoppable” recovery with “no relevant roadblocks.” Fears over mounting unemployment, debt-laden consumers, and dips in recovery are typical of recessionary times, he said.”
(http://www.reuters.com/article/bondsNews/idUSNYS00543920090925)
I interpret this statement that his or ECRI’s position is that there actually isn’t any serious debt crisis going on, just the stalling of credit that was typical for a garden variety recession. This quote implies things will just go back as they were before the recession regarding exponential expansion of private credit, as if an economy can load on debt infinitely. So, is the ECRI’s position that households and businesses (w/o financial institutions) will load on another 25 trillion dollars of debt in the next 10 years? Exponential debt growth has fueled economic growth for the last 30 years. To get economic growth during the expansion phases of the business cycle, private debt has had to about double every 10 years. Are you saying it will double again over the next 10 years? Or where is the robust, “unstoppable” expansion supposed to come from, which is predicted by the ECRI?
rc
October 14th, 2009 at 4:18 pm
Mish failed to see the 60% market rally?!
You mean the 0% loans (aka printed money) handed to Chase/Goldman etc. with a wink wink nod nod “buy the market” condition attached?
http://jessescrossroadscafe.blogspot.com/2009/10/speculative-bubble-in-equities-and-case.html
C’mon Barry. Just because you made some bucks today does’nt mean you should lose yer mind.
Here’s the money supply overlaid the S&P PE ratio:
http://2.bp.blogspot.com/_H2DePAZe2gA/StC3AkKFALI/AAAAAAAAJ-0/ORS-Ic2Plvg/s1600-h/ambandsppe.JPG
’nuff said.
October 14th, 2009 at 4:24 pm
“Dubya’s Double Dip?”
By PAUL KRUGMAN
Published: Friday, August 2, 2002
“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”
http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html
~~~~~~~~~~
Genius. Pure genius.
October 14th, 2009 at 4:35 pm
BDG123
charlatan
October 14th, 2009 at 5:24 pm
This blog is becoming the CNBC of blogs. Glad you’re getting so popular, sad to see the content slip.
October 14th, 2009 at 5:31 pm
I checked and there is nothing to dispute ECRI”s version of events. The January 2008 call says that there is a window of opportunity.
http://www.businesscycle.com/news/press/1402/
And the February 2008 call says that the window is about to slam shut.
http://www.businesscycle.com/news/press/851/
At this point we know the recession started in 2007 but we do not know whether immediate stimulus could have turned things around in Jan/Feb 2008. The mistake may be by those of you planning to time the top and bottom with ECRI calls. As CXO advisory has demonstrated, the WLI is more or less coincident with the stock market. And I guess you could have still beaten the market when they did make their recession calls although you could probably have done better just by looking at the 200-day SMA and using Mebane Faber’s strategy.
October 14th, 2009 at 10:32 pm
Enough with the self-righteous sale pitch from ECRI employees. Please ban all mention of this organization so they can extol their genius on other websites.
October 15th, 2009 at 12:39 am
StatArb Says: October 14th, 2009 at 4:35 pm
BDG123
charlatan
StatArb,
I’m a little slow on the uptake when it comes to certain things, If you wouldn’t mind, could you clearify what you intended in your post, above?
October 15th, 2009 at 8:00 am
Steve Hansen at Seeking Alpha weighs in on ECRI: http://seekingalpha.com/article/166621-why-the-ecri-is-a-good-economic-indicator
October 15th, 2009 at 10:00 am
owen b,
I would reply to Steve Hansen and ask him following:
The only thing I can see from the graph with WLI and S&P 500 is how strongly correlated they are. This suggest that some US stock market index is a major component of the WLI. I don’t understand how the WLI is supposed to help with investing or trading, if there isn’t any regular lead to the S&P 500. Why not using the Nasdaq as predictor for the S&P 500 then? Or just the auto-correlation of the S&P 500?
rc
October 15th, 2009 at 12:25 pm
RC, Anirvan’s busy at the moment, so I’m filling in, especially because you reference me.
You say ECRI “missed to predict” the latest recession. This is not true.
The real misconception is that the timing of a recession becomes inevitable many months or even years before the fact, and that there is nothing anyone can do in the intervening months and years to alter that timing.
As students of the business cycle we know that this is not true, although policy makers and the economists who serve as their advisers are typically oblivious to the critical importance of policy timing.
It is a fact that our publicly release Weekly Leading Index (WLI) peaked in June of 2007, and therefore had a six-month lead over the recession start date, which we learned, a year after the fact, was in Dec. 2007. Furthermore, the widely followed smoothed annualized growth rate turned negative in August 2007, and by the time the recession began in December 2007 WLI growth was already at its worst reading since the 2001 recession. In other words, even our publicly available leading index showed impeccable performance.
Yet this is the launching point of Mish’s tirade against ECRI:
“ECRI makes the following bold statement: “The [WLI] is an index that’s been around for over a quarter of a century, and over that time (shown here) it has correctly predicted every recession and recovery in real-time.””
What Mish didn’t understand after his 10 hours of research is that this isn’t technical analysis. As we discuss in great detail in our book, “Beating the Business Cycle,” the way you determine whether a decline in the WLI is a recession signal is based on how pronounced, pervasive and persistent the declines are in the WLI and its components compared to past recessionary downturns. For example, Mish asserts that the WLI made a false signal in 1987 following the crash. Totally not true. Sticking to our methodology (developed over many decades, not hours) we knew at the time that despite widespread recession fears, there was really no recession risk. The views of our group (we were at Columbia University at the time) was highlighted on page one of The Wall Street Journal as a contrarian call.
Back to my recession call. But the situation was more complicated in the lead up to the recession. We were well aware of the housing and credit problems, and the reluctance of the Fed to move quickly (a whole ‘nother story), but we were aware of a highly unique opportunity of policy intervention from the fiscal side which is practically never a timely option. Specifically, even though manufacturing employment is now only 9% of total payroll employment, in every past recession they had constituted the majority of job losses. We knew that once recessionary job losses began, foreclosures would shoot up, home prices would plunge and there was therefore a risk that the credit crisis would flare out of control. But because of rising recession fears throughout 2007 businesses had slashed inventories to bare-bones levels by November 2007 (the opposite of a normal cyclical pattern), providing an opportunity to create “an inventory short squeeze” that would have postponed the recession at least for a quarter or two, providing a window of time to mitigate the credit crisis.
With this understanding, we allowed that the recession was not a done deal even though we publicly stated in January 2008 that, “a self-reinforcing downturn has already begun. If allowed to continue, it will amount to the vicious cycle known as a business cycle recession.” http://kirklindstrom.blogspot.com/2008/01/ecri-says-there-is-window-of.html
I want to share something else with you all. Some have questioned our motives in all of this. ECRI’s mission is to preserve and advance business cycle research in the tradition established by its founder Geoffrey H. Moore. Also, as far as possible, we are here to help people using our insights from the study of the business cycle. That’s the main reason why we give some of our research away freely. In early January 2008 I personally went to Washington to highlight the extreme risk to the national economy, and the need for urgent action using all policy levers, but especially those that would get money into consumers hands IMMEDIATELY because even if they spent some of that money manufacturers would need to scramble to meet demand, forestalling the otherwise inevitable layoffs, until the lagged effect of monetary policy could begin to provide some cushion. In the days that followed monetary and fiscal policy makers certainly talked the talk, you might recall, slashing rates and enacting the first stimulus package – remember that? Perhaps this was all that was politically possible, but the fiscal stimulus wasn’t designed to hit the economy until about six months after the beginning of recession.
That is why we wrote publicly in January 2008, “Imagine a large Roman column that has just started to topple. At that moment, a modest push back near the top would be enough to right it again. But if its fall gains momentum, it would be virtually impossible to stop it from crashing down. Today, the column that is the expansion has just begun to tip.” Calling for prompt stimulus to temporarily boost consumer spending, we emphasized that “time is truly of the essence – the stimulus is needed in a matter of weeks, not months.”
In early February I told U.S. News & World Report that “The window of opportunity to avert a U.S. recession is about to slam shut. This isn’t good.”
Regarding debt and employment, it is important to understand that some measures cited by analysts like the jobless rate and the savings rate always rise in the early stage of recovery. If those were bars to recovery we’d never have had any recoveries. As far as debt is concerned, that is something that has built up over a long time, as you point out, and will remain a drag on the economy for a long time as a result. The key point is that this does not preclude the business cycle recovery. In fact, our leading indexes are saying that the business cycle dynamics that dictate a snap-back from a deep recession (not the stimulus) is what is driving the recovery forward, and that is why it is currently unstoppable. This is really all about timing.
As students of the business cycle we are confident that there will be another recession, the only question is when. At this time time our leading indexes are telling us very objectively that the next recession will not arrive before mid 2010 at the earliest, that’s all.
October 15th, 2009 at 8:51 pm
rootless_cosmo…
ECRI:
this is THE question – why not use the other indexes to predict the indexes? as you know, this is an illogical do-loop.
using the WLI you would have not bought into the pre-march 2008 rallies.
investing is always sectors and timing. the wli is a tool. like any tool, it works only as well as the person who uses it.
there seems to be a lot of anger out there about the current market rally. i have some myself as it seems unfair people profit as others lose their jobs. i am angry at the government for ignoring jobs creation. i am angry at economists for getting us into this mess.
October 19th, 2009 at 10:09 pm
In re: Mish’s Global Economic Trend Analysis blog: A Look at ECRI’s Recession Predicting Track Record
Having been a member of the Federal Reserve System, principal duties forayed into the analytical expanses of monetary policy- namely open market operations/reserve requirements- influenced the supply/demand equilibrium of bank balances held at regional Federal Reserve districts as a determinant of federal funds rates. Presiding at the helm of the FOMC, Chairman Ben Bernanke, purveyor of short term interest rates, embarked on a campaign of increasing fed funds rates to obstruct perceived inflationary and credit cycle imbalances. Juxtaposed against this backdrop, was an inverted yield-curve commonly perceived as an ominous indicator of looming economic weakness, which went unheeded by the Chairman of the Federal Reserve Board. Prolonged tight credit policies galvanized deteriorating economic forces by negating banks interest margins, in variably curtailing credit inflows into mortgage bank bonds and an array of credit derivatives.
Ineffectual monetary policies proved decisive as a harbinger of disparate national economic ills: credit-implosion, consumer retrenchment, housing inversion and manufacturing ailments as dire consequences of a monetary and policy dogma gone awry. Pursuant to the fact, a multitude of entities have attempted to either ingratiate their models as the decreed standard in the context of current and prior economic readings all the while disavowing existing models, which have proven infallible and without ill-repute in the context of duration tenable over the course of time. One such blog which has piqued my interest of late is the one under the aegis of Professor Krugman of MISH Global Economic Trend Analysis site. It ensconces itself with erroneous and contrived statements and statistical-tells, misconstruing the work of the acclaimed Economic Cycle Research Institute (ECRI), which has been deemed by the investment community, policy makers, G-7 member nations, among other luminaries as precise in data and statistical veracity stemming the course of a century nigh.
The ostentatious contempt by slander of ECRI’s internationally heralded work as an undefiled accurate gauge of future economic conditions compels me to disavow and decry Trend Analysis’ postulates as bereft of merit as I am keen to underscore. MISH’s blog misconstrues statements as to the ECRI interest rate/oil shock recessionary readings as shocks not pronounced and pervasive enough to the degree of triggering an outright recession in lieu of Weekly Leading Index’s (WLI) buoyancy. The clichéd use of ‘Its different this time’ is unqualified defamation. In haranguing this affront, preceding interest rate/oil shock indicators can be correlated to the Director of Research at the ECRI – Mr. Anirvan Banerji – in his examination of the Katona effect which measures and incorporates attributes of consumer spending to oil-price level gyrations. The volatility of the intermediate standard deviation of food/energy CPI has dovetailed with alacrity underlying movements of consumer spending. It essentially has been espoused that oil-shocks of particular magnitude always portent a recession in conjunction with the ECRI’s vaunted WLI’s, created by Dr. Geoffrey H.Moore. Hence, the ECRI is on official record of disseminating the criteria for the plunge in WLI’s, underscoring the prior quarter’s buoyancy of the economy’s resilience stoked by Fed rate hikes and oil price spikes. Attenuated interest rate level and policy stimuli did not arrive opportunely to stanch impending economic upheaval.
The ECRI’s key denoted aspects are the cogs of the economic wheel scrutinized in data minutiae: inflation; employment; growth. The former indicator is known by the founding institute as the Future Inflation Gauge (FIG). Managing Director of the ECRI, Mr. Lakshman Achuthan, has gone on record at the advent of 2008 incontrovertible to the financial community that WLI and FIG have borne about real-time readings of unequivocal economic downswings which the policy-setting authorities could have thwarted with timely interest rate cuts which never materialized. The dour WLI’s were telegraphed as imminent and manifest danger in spite of a benign FIG reading. As a consequence of inopportune monetary and fiscal stimuli timing, morose indicators including, (but not limited to), leading home price indexes, overall employment, manufacturing (historically 1/3 component aggrandizement of the GDP), services and trade balance impaired piecemeal. These indicators monitor with meticulousness the peaks and troughs of the business cycle within a period of space and time, so as to give a synchronous read on the health of the economy.
As the ECRI has been wont to do over its esteemed existence with a resolutely unmarred real-time record, so too do an amalgamation of leading indices bolster the institute’s call for a ‘V-Shaped’ recovery. Belated stimulus infusions have resulted in an accelerated burst of consumer spending, forcing manufacturers to replenish dilapidated production instead of whittling down already-lean inventories. In response to the Fed allowing M2 money-supply growth to accelerate via its open-market activities, this liquidity in conjunction with a positive turn in private sector borrowing, has supported a cyclical recovery in stocks and nominal GDP with a marked increase in the velocity of money. Weekly and coincident indicators have gained momentum quarter over quarter with rising retail and industrial production numbers buttressing dramatic increases in corporate profits, as rising output has risen sharply and earnings power has recovered. Negative job loss momentum is abating in the wake of improved spending and production. New factory orders are rising indicative of manufacturers newly-engendered confidence. Single and multi-family housing starts, indicative of building permits issued, reported brisk activity signifying an upturn in demand for new housing. In addition, the level of capacity utilization has been gaining momentum in tandem with the aforementioned. Pronounced among all indicators is the S&P 500 index, closely aligned by WLI’s time-tested parallel underlying general directional changes; exhibiting all traits of a V-Shaped recovery, much to the chagrin of the doomsayers.
In summary, the preceding vividly illustrates a preponderance of date sequences embedded within leading and coincident economic indicators which have gauged without flaw directional business cycles over the past century. While ECRI never attests to predicting the magnitude of upheavals and upturns, the trajectory of the discerned move has always been accurately presaged in real-time. It is deplorable that the author of MISH’s Global Economic Trend Analysis resorts to beguilement and disinformation to entreat the reader of the blog to one of the most pronounced and venerable economic forecasting institutes of its time. I, along with views shared by members of the international financial community, laud ECRI principal members’ indefatigable work in striving for and attaining continued detailed conformity to directional business cycle gyrations with paramount exactitude .