Monday, July 6, 2009

Economic Cycle Research Institute Predicts Recession End

Reading all of the economic news of late, its become important to focus on the leading versus lagging indicators in this economy. The Economic Cycle Research Institute (ECRI) has long been a forecaster of economic cycles and was even very accurate that the 2008 recession would get worse back in March 2008 when a whole slew of economists thought we might even skirt a recession.

According to their latest report , the weekly cycle indicators they use continue to show that the recession is in the process of ending. This is contrary to all the news you've probably read since the June jobs report was released last Thursday morning. Jobs of course are a lagging indicator and it amazes me how many economic 'experts' reported that the economy couldn't recover until the jobs improved. Yet every recession has ended long before jobs improve. That's why its so crucial to understand leading versus lagging indicators.

I'll have to admit that I'm not all that familiar with the indicators used by the ECRI though they are clearly very accurate going back thru time. Just looking at the March 19th report, they were spot on back then that the economy was going to improve by summer. Whether using the ECRI data or the Leading Indicators from the Conference Board (up dramatically the last 2 months), one can clearly see the economy improving now and how the economy was set up for a dramatic fall back in 2007.

Interesting how the Weekly Index showed on a 4% increase on the same day that the jobs report was supposedly so bad that the market sold off. If the market was at all logical and not emotional, it would've followed the ECRI report and rallied strong. The ECRI suggests that a V shaped recovery is very possible. That strong recessions are followed by strong recoveries. Don't pay attention to the weak recovery after the 2000-2001 recession. It was a weak recession after a huge growth period. Not much to recover from compared to this smashing recession.

Excerpts from the recent ECRI report:
  • The economic forecasting gauge with the best track record was positive in the past two weeks for the first time in nearly two years.
  • The Weekly Leading Index from the Economic Cycle Research Institute was up 2.1 percent when it came out June 25 and then up 4 percent Thursday.
  • "We'll definitely see the end of this recession this summer," ECRI managing director Lakshman Achuthan said Wednesday. "As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts."
Excerpts from a Marketwatch.com report questioning the 2nd half recovery:

  • "It is worth noting that there remains a wider-than-usual variance among our panelists about the prospects for economic growth over the forecast horizon," the Blue Chip Financial Forecasts said.
  • What that means is that, while the consensus of a 2.8% growth rate by the second half of the year looks pretty good, it turns out that that this estimate just masks a dog-fight between economists.
  • One camp of optimistic economists sees growth averaging 3.8% from June through December. A pessimistic camp sees growth closer to an anemic 1.8%.

Just love this quote from the ECRI managing director: "Giant Error of Pessimism". I see it every day as I review blogs such as SeekingAlpha.com or numerous others. They love to focus on the lagging indicators like jobs.

  • "The general mood is probably overly pessimistic. That's quite normal in the wake of a crisis. There is almost always a giant error of pessimism," he said.

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