Why ECRI’s Recession Call Stands
Lakshman Achuthan & Anirvan Banerji
March 15, 2012


Many have questioned why, in the face of improving economic data, ECRI has maintained its recession call. The straight answer is that the objective economic indicators we monitor, including those we make public, give us no other choice.

Let’s start with the current state of the economy. A couple of weeks ago, we publicly highlighted ECRI’s U.S. Coincident Index (USCI). It’s important to understand that the USCI isn’t a random concoction of data, but rather the gold standard for measuring current economic growth, as it summarizes the key coincident economic indicators used to determine the official start and end dates of U.S. recessions; namely, the broad measures of output, employment, income and sales. So when USCI growth is in a downturn (bottom line in chart), it’s an authoritative indication that overall U.S. economic growth is actually worsening, not reviving.

In contrast to the 3% GDP growth widely reported for the latest quarter, year-over-year growth in GDP, after peaking at 3½% in Q3/2010, has basically flatlined around 1½% for the last three quarters. Broad sales growth has followed a similar pattern, while the growth rates of personal income and industrial production have dropped to their lowest readings since the spring of 2010.

The exception to this weakening pattern is year-over-year payroll job growth, which continued to improve through January, and was essentially flat in February. However, the empirical record shows that job growth typically turns down after downturns in consumer spending growth, not the other way around. Because consumer spending growth remains in a cyclical downturn, we expect job growth to start flagging in the coming months. But the point remains that the USCI, which summarizes the definitive coincident economic indicators – including jobs – indicates declining growth in the U.S. economy.

How about forward-looking indicators? We find that year-over-year growth in ECRI’s Weekly Leading Index (WLI) remains in a cyclical downturn (top line in chart) and, as of early March, is near its worst reading since July 2009. Close observers of this index might be understandably surprised by this persistent weakness, since the WLI’s smoothed annualized growth rate, which is much better known, has turned decidedly less negative in recent months. The unusual divergence between these two measures of growth underscores a widespread seasonal adjustment problem that economists have known about for some time.


WLI and USCI y-o-y growth


Most data, both public and private, are seasonally adjusted. But the nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years. This is normally a good thing, but when the economy fell off a cliff in Q4/2008 and Q1/2009, it was partly interpreted by these procedures as a lasting change in seasonal patterns. So, according to these programs, data from Q4 and Q1 would be expected thereafter to be relatively weak, and therefore automatically adjusted upwards. Our due diligence on this subject indicates a widespread problem, resulting in many recent economic headlines being skewed to the upside.

However, we have no way to objectively measure the extent of these problems – either the upward bias for Q4 and Q1 or the downward bias for Q2 and Q3. Fortunately, year-over-year growth rates are naturally less susceptible to these seasonal issues because they involve comparisons to the same period a year earlier that is likely to be skewed the same way. In contrast, smoothed annualized growth rates, which we have traditionally preferred, presume proper seasonal adjustment. While the extent of the seasonal problem will be debated, monitoring year-over-year growth rates is a matter of simple prudence at this juncture not only for ECRI’s indexes but also for other economic data.

In the chart, please note the one-to-one correspondence between the cyclical swings in the year-over-year growth rates of the WLI and USCI since the Great Recession. Both surged initially, only to roll over, pop up briefly, and then turn down once again. It is notable that the WLI, which is sensitive to the prices of risk assets that have been supported by massive worldwide liquidity injections, has hardly been swayed from its recessionary trajectory. In spite of the efforts of monetary policy makers, actual U.S. economic growth has slowed, while WLI growth has barely budged from a two-and-a-half-year low.

The bigger question is, can unprecedented, concerted global monetary policy action repeal the business cycle? The objective coincident and leading indexes that we have always monitored are still telling us that it cannot.

Data source for Coincident Index (XLSX)

Category: Cycles, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

38 Responses to “Why ECRI’s Recession Call Stands”

  1. NervousRex says:

    For sure it takes a lot of guts to make a call like this and stick with it.

    However, unless we want to become sycophantic to a couple of metrics whose
    provenance we do not know, we have to look at the facts.

    1) Seasonal adjustment is a farce. There is no good reason in this day and

  2. NervousRex says:

    oops! Try again. More coffee.

    1) Eschew seasonal adjustment. It is a black box and a farce.
    2) unemployment statistics (except U-6 and EMP ratio) are bandpass filters,
    and over time skew the data,

    Why use invisible machinery to produce two numbers we can then argue over?

    It seems the concepts in economics are simple enough that open equations
    (like open source software, and open lab notes) are the way to make
    data that people can actually analyze. Otherwise we’re just primates
    banging on two numbers with sticks.

  3. [...] Why ECRI is still looking for a recession.  (Big Picture) [...]

  4. PeterR says:

    Excellent post. Thank you Barry for continuing to provide ECRI’s insights.

    Great to have the noise removed from the data, at least that which is possible to remove.

    Folks, the two line graphs above appear to have a good track record back to 1990. At a minimum, would not a rational person conclude that an optimistic view of our current economic “recovery” is not warranted just now?

    The higher the stock market marches on (with the underlying economy weakening), the higher the probability that a “crash” is being built into the overall system! In seismologic terms, the stresses in the fault zone are building. Make sure you have an escape and survival plan.

    Beware “The Ides of March!”

  5. InterestedObserver says:

    It’s important to listen to the objective data in hand, and kudos to ECRI for not hedging given the data that they see.

    I sort of wonder if this is simply a case where getting a little dinged (on the way to a typical recession) still feels pretty good relative to getting kicked in the mouth (the credit bubble implosion).

  6. Ted Kavadas says:

    This is an interesting perspective.

    One thing that I have noticed about the ECRI WLI & ECRI WLI, Gr. measures is that – from a casual observation perspective – each appears to have a “dead cat bounce” look. I find this very notable. As well, the ECRI WLI, Gr., while it has been recently consistently improving, is still negative:


    Another point that Lakshman Achuthan made during a February 24 CNBC interview is the velocity of money. This measure paints a disconcerting trend.

  7. VennData says:


    They will “open source” the numbers when this prediction fails as they will have no value to institutional buyers of this sort of astrology… er… a… economic predictions.

    Now it may not happen this time, but it will, probably this time, but no one knows.

  8. streeteye says:

    4th warmest winter on record has surely made economic data look better than underlying trend


  9. “The higher the stock market marches on…”

    http://finviz.com/quote.ashx?t=AAPL&ty=c&ta=1&p=d ~now ~590/sh.


    http://www.thefreedictionary.com/perturbation (go with 2.b.)

    as an aside, I wonder how many, when reading something like..”…Make sure you have an escape and survival plan…”, actually, give it, Any, thought..

  10. bda_guy says:

    I have a certain amount of respect for Lakshman given the conviction of his calls. However, I’ve always been bothered by two aspects of the interviews that he provides regarding his indices.

    First, his descriptions are very opaque, making references to coincident and leading indicators but failing to describe what any of them are. This post helps address at least part of that.

    Second, I always remember him saying that his indices are not “models” implying that they are not willy-nilly made up results based on some flawed econometric theory. To me, an index is an series of identifiable observations regarding a well defined metric. To me, his “indices” appear to be some collection of other indices. The fact that it’s a collected result of other inputs, regardless of how crude and rudimentary it’s put together is, by my definition, a “model”. To say that his indices are not models comes across as disingenious or, at the very least, demonstrates a lack of understanding what a model actually is.

  11. JoseOle says:

    I don’t see their sticking with the recession call as a gutsy move. The way I see it, they have no choice — most of the firm’s reputational equity is on the line and a mea culpa at this point won’t salvage much of it.

  12. Moss says:

    The bigger question is, can unprecedented, concerted global monetary policy action repeal the business cycle?

    Good question, especially the unprecedented part. Don’t think it can ‘repeal’ the business cycle but it certainly can and has built in the expectation of more. That is the real question. Will it continue?

  13. wally says:

    I predict a recession… someday. I also predict a boom… someday. If I stick to my predictions, do I get credit for both… eventually?

  14. AHodge says:

    Dear Lakshman
    QUOTE nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years. UNQUOTE
    generally when i read something like this i tend to run away.

    But specifically you appear unaware that some agencies and series are already correcting for this?
    AKA the 4Q 2008 problem
    including that i know of the Fed with industrial production and some ISMs

    seasonal adjustment is a work in progress and your point is partly right
    but only a fool (a few others here) would try to do short term trend analysis ignoring seasonals

    your secret index likely still includes yield curve
    where most serious students of leading indexes are considering dropping after the QE etc. and is currently giving more of slowdown signal than it should

  15. dougc says:

    At this point in the business cycle we should be seeing reduced fiscal stimulis and increasing short term interest rates to fight inflation. Instead we are having deficits of almost 9% of GDP and historically large global QE. ECRI predicts a recession starting in the first half of this year, we will soon find out if it’s different this time. Trying to correlate the GDP growth to stock market indexes is dangerous. The market doesn’t care about the economy, until it does.

  16. Mish says:

    Agree with the call.
    Not the disingenuous way it is presented.
    Not the track record as presented.


  17. Molesworth says:

    LA wrote:
    Most data, both public and private, are seasonally adjusted. Our due diligence on this subject indicates a widespread problem, resulting in many recent economic headlines being skewed to the upside.
    However, we have no way to objectively measure the extent of these problems.
    * * *
    OK, I get what he’s attempting to communicate: What we measure isn’t accurate anymore and we don’t believe the numbers and neither should you. You should believe us.

    But isn’t that what they do? Measure? Aren’t they the measuring fools? Now they writes that they can’t “objectively measure” anymore? If they can’t find non-seasonally adjusted, or they can’t take the seasonal adjustment out of their numbers, then wtf are they doing?

  18. Mark Down says:

    This is a story for the MILFS over at Fox Biz!

  19. bear_in_mind says:

    @DougC: Exactly right.

    The market may party for months to come, maybe even through the end of the year, but money printing cannot continue indefinitely without serious, if not severe, economic consequences.

    The FED may have already lost the battle to keep a lid on interest rates as seen in recent auction action. Also, look at today’s release on the PPI for February = up .4 pct overall; up .2 pct (minus energy). Not earth-shaterring, but gotta think these #’s will go higher via future revisions.

  20. susanj says:

    @AHodge: You missed the point he seems to be making.

    Regardless of whether or not there are widespread seasonal adjustment problems, all he’s saying is look at the y-o-y growth rate of the seasonally adjusted data, which is what everybody has done since the beginning of time.

    And I don’t know whether the yield spread goes into their WLI, but it sure doesn’t go into their coincident index.

    The biggest revelation for me is that actual economic growth is falling in y-o-y terms, contrary to what the Street believes. Whether or not their WLI is any good and their recession forecast pans out is another story, which you’re quibbling about on the basis of your assumption that it includes the yield spread, which may be totally wrong for all I know.

    BTW, if they use the yield spread, why would they have this on their site?

  21. AHodge says:

    Further to my earlier, and more fundamentally your conclusion

    “The bigger question is, can unprecedented, concerted global monetary policy action repeal the business cycle? ..it cannot”
    Wrong question this time
    there is no way that now
    is anywhere close to the normal business cycle top you use LEIs to call
    as even you can tell
    this is a faltering from half broke finance in the US and Europe-its different
    your approach is simply not capable of knowing whether the steps taken will eventually work to counter that?
    Except for actual trend monitoring, and very near term indicators
    where you are pretty much sticking your head in the sand
    i note just today indications march auto sales will be gangbusters?
    still want to take my earlier public offer? 2/1 on large there will not be an NBER recession starting 1H? hate to call you a loser-better dig youself out of this one soon??

  22. AHodge says:

    well thanks susan–i go out in everyones face and see what ya got
    thats good on yield curve-a pleasure to learn
    but not buying the yoy slower as key
    if we had a little inventory boom in late 09-10 that we slip some from
    no biggie
    and if you can answer my latest–bring it
    it is-i mean it- a pleasure to lose

  23. AHodge says:

    i also find his babbling about money velocity completely useless
    and likely to fool himself ;)

  24. AHodge says:

    and of course the bet is open to you susan–and anyone else with acceptable collateral? only believable counterparties please?

  25. AHodge says:

    march is a near lock plus, weekly auto, retail and claims among others suggest at least 10/1?
    that leaves you 3 mo for a first month NBER downturn
    bad stuff can happen,
    but Id put the actual odds of a 1H recession monthly start at more like 6/1
    based mainly on horrible surprises
    no way to run a forecast lakshman

  26. dickens says:

    Well, setting aside all other arguments, wouldn’t the seasonal adjustment factors exhibit precisely the same behavior after the end of every recession as they do now? I mean, we have been seasonally adjusting economic indicators for a long time — depending on the indicator (some weren’t in existence), most post WWII recessions should be subject to the same distortions.

  27. AHodge says:

    dickens good q
    if you take seasonals over a 30 40 year period and lots of recessions with nearly random times of the year
    the recession effects mostly wash out of seasonal
    but often the Govt x-11 and x12 adjustment packages only take 10 years of quarterly or monthly, partly because some seasonals esp those like holiday sales can change a lot over time.
    then you have the all- time whacking biggest postwar decline in late 2008
    and only one other mild recession in 01, also late in year
    the seasonals see average ten year 4Q as dropping a lot when its mostly that one collapse.
    that is a false excessive read of seasonal,
    but the more common problem of seasonals is they do not adjust enough
    partly to avoid the first problem— the screening is set for a high confidence level that its not random.
    usually i would make that bet.
    that there will be more seasonal than adjusted for.
    That can give you a little edge in calendar forecasts
    and lord knows we need it.

  28. AHodge says:

    there is no question seasonal probs and warm weather have pushed 4Q up a little more than trend. and 1q may be slower say 2% with still little warmish weather. thats about the extent of any seasonal and weather problems,
    and the latter is not strictly statistical, good weather is good for the econ.
    i dont see anybody taking my no recession 2Q bet in spite of 2/1 odds.

  29. AHodge,

    w/this..”…and of course the bet is open to you susan–and anyone else…”

    Which bet, exactly, are you referring to?

  30. andrewp111 says:

    Everything is on hold until the general public goes all-in to the Market. When all the suckers throw in the towel and go all-in, the bottom will fall out and leave then all holding the (empty) bag.

  31. AHodge says:

    its from my 3.16 post yest

    “still want to take my earlier public offer? 2/1 on large there will not be an NBER recession starting 1H?”

    that offer was that there would be a business cycle peak–NBER dated– and one month of decline by June 2011—
    which is basically Lakshmans forecast still,
    i pay for example $1000 if there is one, you pay $500 if there is not?

  32. AHodge says:

    but i have been too harsh here laksh
    ECRI and you have an honorable tradition-and are one of a small fraction of economists who make any sense. Not that even they can agree. This is a case of boxed in by your early public statements, and hoping for a miracle( or in your case a f..ing disaster) Happens to most of us at least once, and it doesnt feel good…?

  33. dickens says:

    AHodge: Maybe the employment models are screwing up my perception. When I used to do the fine-tuning of local employment estimates, the resulting numbers were obviously not seasonally adjusted to start with, but the BLS model used at least a 20-year trend as one of the major inputs into the raw numbers. I was also a bit facetious in referring to post WWII recessions, as I think most market observers will agree that the U.S. economy changed so greatly since that time that even the early 80′s double-dip is of limited value in producing forecasts.

  34. Boots or Hearts says:

    AHodge: until you are invited to “guest post” here by BR, and then start hitting the lecture circuit (which upgrades your opinion from important only to you —>dubious) I will take L. A. And ECRI over your spam.

    There was a time when BR went on kudlow warning of the imminent housing sham and related Financial collapse, only to be scoffed at by people driving in the rear view mirror. Luskin If I recall, I no longer watch.

    Time will tell is all I can say about this cycle, and it’s all you should be saying unless you want to post credentials.

    Have a great weekend

  35. [...] economic data has improved in the U.S. since that time. This hasn’t moved the ECRI at all. It defends and explains its call here. The basic point is that the data used by ECRI is true leading economic data, while the data [...]

  36. AHodge says:

    B or H
    this is a contest of ideas, mostly anonymous
    which i like since i cant post my name with a govt economist job
    if you have any more than “time will tell” let us know
    if an exchange of opinions by apparently confident people annoys you
    why are you here
    i dont think anyone including me “knows” shit
    but i still have fun crushing in a debate..is it only in my mind Im the last one standing
    on what my japanese friend calls the muddy battlefield on this one? i learn something every time
    but clearly not from you

  37. AHodge says:

    She calls this blog the muddy battlefield