Many commentators have focused recently on an index produced by the respected Economic Cycle Research Institute (ECRI), which suggests that the U.S. economy is slowing. The ECRI's proprietary U.S. Long Leading Index (USLLI), which goes back to 1919, is signaling a slowdown. However, analysts at ECRI don't think this is a sign of the dreaded "double-dip" recession. In their view, a decline in growth after a sharp post-recession growth spurt is to be expected.
The Trend Is Down, but For How Long?
The ECRI claims that "unlike standard leading indicators, the USLLI is more prescient than the markets about the business cycle." In other words, while the stock market might still be declining, reflecting gloom, the business cycle might have already turned from recession to growth.
The ECRI sells its research, and so the composition of its various indicators is not made public. Though many observers attempt to guess their components, the specific indicators remain a closely-guarded secret. As Lakshman Achuthan, managing director of ECRI and co-author of the book Beating the Business Cycle, emailed me last year: "The actual components are proprietary, but still over the years I have come across many such lists, long and short, and have yet to see a list that was correct. Also, there seems to be a misconception that the WLI (Weekly Leading Index) is a model. It is not a model in any sense of the term used by people in the economics trade."
A number of analysts are skeptical of ECRI's forecast that there will be no double-dip recession because the ECRI's Weekly Leading Index has gone into free fall. Below are two charts of the WLI: the first is a short-term snapshot and the second is a long-term graph which goes back to the 1970s. (The data are from the ECRI website.)
Mish Shedlock of Mish's Global Economic Trend Analysis summed up the skeptic's case via email:
[ECRI's] much trumped up leading indicators are really not much more than coincident indicators heavily skewed to the performance of the stock market. Housing starts are one of the best leading indicators and they do not even factor that in.
The ECRI claims to have called every recession in advance and that is a huge distortion of reality. It only seems they can predict recessions because the NBER is even later in calling recessions than they are. By the time the ECRI predicts a recession it is generally clear to everyone but dunderhead economists that we are already in one. Part of the problem is the ECRI is in dreaded fear of calling a recession that does not happen.
The other issue in forecasting slow growth as opposed to a recession is that the difference to most Americans is purely academic; recent polls suggest that about 75% of the public don't see the economy improving. The difference between a jobless recovery in which jobs are scarce and credit is tight for small businesses and a full-blown recession is one of theoretical construction rather than reality.
Double-Dip By Another Name?
Record corporate profit margins have sent stock markets roaring 80% higher since last March, but the rise in profits may be short-lived as factors such as inventory build-out, the rising dollar and the decline in government stimulus and support of the housing market start taking their toll on corporate revenues and pricing power.
Double-dip recession or growth so marginal that it's only barely statistical "growth"? If the job market is moribund, small businesses can't get credit and corporate profit margins are tightening, then what we label it is more a matter of perception and spin than of meaningful substance.