However, the attention to the WLI has been accompanied by a deluge of misinformation which we tried to address in an article titled, Weekly Leading Indicators Widely Misunderstood. We’re concerned that, since then, further unenlightened commentary is still creating such confusion about this very useful tool that it will undermine confidence in its efficacy. We therefore address the main lines of criticism.For me, these graphs that I printed last week put the issue in perspective.
....Some prominent voices representing this group of analysts, who had hurled scorn on the WLI on its way up last year, seem to have decided that the WLI is their new best friend. One widely-quoted commentator famously declared that the WLI has always been correct in calling a recession whenever its growth rate fell below a specific threshold. Many who read this concluded, in essence, that the WLI was infallible as a recession predictor. All we can say is that we’re flattered, but if there’s anyone who thinks that an infallible economic indicator actually exists, he should get in touch with us right away, as there’s a wonderful bridge we’d like to sell him.
It’s true enough, based on the four decades of publicly available data, that WLI growth has never dropped this far without a recession. What most don’t know – apart from the fact that the WLI growth rate shouldn’t be used to predict recessions in the first place – is that, based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below current readings, but no recessions resulted.
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In our book, we’ve described in detail how we look for pronounced, pervasive and persistent cyclical swings in multiple leading indexes in order to make a recession or recovery call. This is a disciplined, objective process we’ve always followed, allowing the chips to fall where they may. Our forecasting approach hasn’t changed, regardless of the torrent of criticism directed at ECRI or the WLI by interested parties.
The U.S. economy is now firmly in the grip of the economic slowdown that we’ve been predicting at least since January. The reality is that, historically, a little more than half of such slowdowns have culminated in recession. Thus, we already knew back in January that, once this slowdown began, there would be a significant risk of recession.
However, a recession is hardly baked in the cake, which is why we aren’t making a recession call at this time. Simply put, we don’t predict the predictors. If we see our collection of leading indexes (including the USLLI, which turns ahead of stock prices) swing decisively toward the recession track, we’ll make a clear recession call. Until then, we’ll keep monitoring our leading indexes, as we’ve done for decades.
This graph shows the GDP growth rate for the first four quarters after the end of the recession for the last three recessions. The 1991 recovery moved lower for the first three quarters only to bounce higher in the fourth quarter after the recession ended. The 2001 recovery continued to move lower for the four quarters after the recession ended. This recovery has printed some strong numbers in the second and third quarter coming out of the recovery, only to move lower in the fourth.
And the median growth rate for this recovery is nearly a percentage point higher than the previous recoveries.
Over the last month or so we have seen a slowdown in the manufacturing sector. However, None of those indicators have moved into contraction; they are all showing a slower expansion in that part of the economy. And the dollar's recent drop should lead to higher export totals in the coming months. Yesterday's ISM number for the service sector showed an increase. PCEs have slowed as well, but they are not crashing either. In short, things are slowing; they are not dying.
3 comments:
Some more very poor analysis. In 2001 there weren't even two consecutive quarters of negative GDP. This was barely even a recession, few jobs were lost, and certain areas of the economy never even stopped growing. To compare 2001 and 2002 to 2009 and 2010 is ridiculous. The 1991-1992 resembles current conditions somewhat, but the recession was much less severe. So to compare the current recovery with that early 1990s recover is misleading because back then growth occurred from a higher relative base.
Number two, Bonddad believes that a few PMI indicators is more indicative of continued growth going forward than the ECRI leading index. That is very poor analysis. The PMIs are sentiment indicators that don't indicate the "degree" in improvement, and they also show upward bias coming out of severe recessions simply due to the failing businesses leaving the survey and the remaining businesses taking over the failing businesses old customers. As far as being sentiment indicators, when business gets so bad, like it did in late 2008/early 2009, then improvement is easy because it's coming from an extremely low base.
Also, there have been many examples were the PMI surveys were in the low 50s and there were GDP annualized growth rates of between -1% to +1% or +1.5% for a quarter or two. Q4 2002 and Q1 2003 is one example, which essentially felt like we were again in recession and there were new tax cuts and monetary easing to get us out. The manufacturing PMI ranged between 50 and 54 leading up Q4 2002. Then there was Q3 2006 and Q1 2007 when there was no growth and PMIs were between 50 and 54. The first half of 1995 there was no GDP growth and the manufacturing PMI was at 57.4 in January of Q1 and 55.1 in FEbruary of the 0.98% GDP quarter.
In 1974 GDP growth was Q1 -3.47%, Q2 +1.0%, Q3 -3.8%, and Q4 -1.5% and the manufacturing PMI was Jan 62.1, Feb 58.6, Mar 61.8, APr 59.9, May 55.7, June 54.7, July 54.8, Aug 52.9, sept 46.2, oct 42.7... So we have a recession for the first three quarters of the year but very strong PMI survey results (through they get weaker every month).
Last, Bonddad apparently dismisses the ECRI leading index which includes many metrics, yet supports PMI survey results which are simply sentiment surveys and leave out many other metrics and dynamic occurring in the economy. That's extremely poor work.
1.) I used the last two recessions because they were considered "jobless recessions." AS for the 2001 recession, take your issue up with the NBER
2.) Once again, you claim the ISM numbers are biased because of firms leaving the survey and therefore skewing the numbers without offering any proof of same. Standard statistical methodology incorporates these types of changes. The same allegations have been made regarding retail sales figures even though the Census Bureau routinely accounts for those types of changes. If you have specific information from the ISM proving they do not adjust for companies leaving, please present it. Otherwise, it's a pure strawman argument.
3.) You ignore the main point: the people who compile ECRI data and interpret it -- those who are closest to the data -- do not support the conclusion that a double dip recession is around the corner.
4.) I used the ISM numbers merely to illustrate that there is no evidence from the numbers that the economy is going straight to hell. Also note all the regional manufacturing surveys show a slowdown but not a contraction.
5.) The GDP numbers you cite support the ECRIs conclusions from their data that a slowdown is underway, but not a contraction/recession.
Of course, the actual situation on the ground for people is generally quite bad and is probably getting worse.
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