- by New Deal democrat
As readers know, I am trying to reverse engineer the ECRI Weekly Leading Index. Prof. Geoffrey Moore recommended 11 elements for this index when he proposed it in 1990. As originally conceived, the weekly index was supposed to anticipate the monthly LEI, which had to rely on late reports like housing permits and durable goods orders. By contrast, the 4 monthly numbers incorporated into the weekly index would all be known within one week of the end of the previous month. The weekly index would be slightly less reliable than the LEI, but by dint of early report, would be very useful.
Ten of the 11 elements are publicly reported (the 11th is Dun and Bradstreet's weekly number of business formations and dissolutions which is not available to the public). Of the remaining 10, six are weekly series and the other 4 are the monthly series noted above. I have already created several preliminary graphs based on only 7 elements which look very close to ECRI's Weekly Index, including its roller coaster ride of the last two years. So it's time to beta-test and make refinements based on the results.
The list below is the changes in those 10 numbers for the last week. The only change I have made is the substitution of credit spreads for real M2, which I have reason to believe was replaced on the list. Another issue is whether ECRI continues to include the early monthly reports, or changed Moore's original concept by only relying on weekly reports. The last issue is whether the report is an unweighted average of the elements or not. I am giving two forecasts for the WLI, one that includes and one that does not include the early monthly reports. The forecast assumes an unweighted index.
The following weekly components changed as follows for the week ending January 6 (YoY change in parenthesis):
DJ Bond Avg -.07 to 114.58, or -0.1% (YoY up from 111.12, or +3.1%)
S&P 500 +20.21 to 1277.81, or +1.6% (YoY up from 1271.50, or +0.5%)
Initial Jobless claims*: +27,000 to 399,000 or -6.8% w/w (YoY -15,000 from 414,000, or +4.8%)
Commodity price changes: +2.47 to 119.81, so +2.1% (YoY -17.05 from 133.65, or -10.4%)
Purchase Mortgage applications: +8.1% w/w (YoY -17.9%)
10 year treasury - BAA credit spread*: +.02 to 3.29%, or -0.6% (YoY up from 2.69%, or -18.2%)
If only weekly series are used, the predicted week over week change is +0.7, and the YoY growth rate is -6.4.
The following early monthly reports changed as follows (YoY change in parenthesis):
Avg manufacturing workweek +.1 to 41.5, or +0.2% (+.2 YoY, or +0.5%)
Unemployment 0-5 weeks*:+159 to 2669, or -6.0% (YoY -32, or +1.2%)
ISM vendor performance flat at 49.9, or 0.0 (YoY -6.8, or -12%)
ISM inventory change -1.2 to 47.1, or -2.5% (YoY -4.7 or -9.1%)
If the early monthly reports are included, the unweighted predicted weekly change is -0.4 and the YoY growth rate is -5.8.
[*Note: these are inverse relationships, so the higher the number, the lower the growth score]
We'll have an answer tomorrow. I anticipate refining the forecast as I am able to determine better how ECRI constructs their Index.