June 25, 2010
The Economic Cycle Research Institute’s Weekly Leading Economic Growth Rate Index continues to drop further into negative territory. For the week ending June 18, ECRI’s Growth Rate Index dropped from -5.8 percent in the prior week to -6.9 percent. ECRI’s Managing Director, Lakshman Achuthan said as stated in a Reuters article that the 56-week low in the widely-followed Growth Rate Index “underscores the inevitability of the slowdown”.
ECRI Growth Rate and Recessions
If a slowdown is in the cards for the U.S. economy, the question then becomes if we are to see a double dip recession or not? Achuthan said there needs to be a “persistent” decline in the index in order to determine the possibility of a double dip in the U.S. economy. Bondsquawk, took a stab at defining a “persistent decline” in this article, posted several weeks ago.
In addition, when the ECRI Growth Rate Index first declined several weeks ago to a negative print, which was the first since 2007, David Rosenberg, chief economist of Gluskin Sheff stated in his June 14 daily report, “Breakfast with Dave” the following.
After predicting the V-shaped recovery we got briefly in the inventory-led GDP data when the index soared off the bottom in late 2008, at -3.5%, we can safely say that this barometer is now signaling an 80% chance of a double-dip recession. It is one thing to slip to or fractionally below the zero line, but a -3.5% reading has only sent off two head-fakes in the past, while accurately foreshadowing seven recessions — with a three month lag. Keep your eye on the -10 threshold, for at that level, the economy has gone into recession … only 100% of the time (42 years of data)
Suffice it to say, when the ECRI was drifting lower in 2007, it got to -3.5%, where are we are now, in November and unbeknownst to the consensus at the time that a recession was only one month away. Remember that the economics community did not call for recession until after Lehman collapsed – nine months after it started; and go back to 2001, and the consensus did not call for recession until after 9/11 and again the economy had been in recession for a good six months). We should probably point out here that real M3 has contracted at the fastest rate since the early 1930s, as John Williams has published, and declines in the broad money measured has foreshadowed every recession in the past seven decades.
While we are not quite at any of the aforementioned thresholds, the prospects appear dim given the recent economic data releases of weak consumer spending, dismal real estate numbers, and continued slack in employment. In addition, the recent FOMC downbeat assessment of the U.S. economy gives little reason for optimism.
Despite the decline in the Growth Rate Index, the Weekly Leading Index rose slightly from a revised prior weekly reading of 122.4 to 122.9 for the week ending June 18.
ECRI WLI
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