ECRI: CHANCE OF RECESSION GREATER THAN 50%
Well, I’m not going to lie – the ECRI has me utterly confused now. At the market peak they were calling for sustained jobs growth, a continuation in the recovery and a flat stock market (which was approximately 10% higher at the time). None of the above were right. Now they’re saying the probability of a recession is the equivalent of a coin flip. In other words, this “leading index” isn’t really telling us anything we don’t already know. My guess is that the admission of a recession won’t come until well after fact. The creators of the index have gone out of their way to tell readers why the index is misunderstood. While I’d like to give them the benefit of the doubt I am having a hard time seeing how this isn’t merely a coincident indicator.
They’re probably trying to preserve credibility of their indicator by having all options open. That destroys the credibility of a leading indicator, though. Who knows?
Reminds me of this ftalphaville article yesterday,
http://ftalphaville.ft.com/blog/2010/09/01/331506/not-another-freaking-economic-indicator/
These last few years have been great at glorifying predictors and then pulling them down. I guess the point is being driven home that prediction is a bad business model. Careful analysis is still useful to guage probabilities. But probabilities are not certainties.
I meant, even high probabilities are not certainties. There’s always risk – question is only whether risk is high/low.
Me thinks we are in for at least a couple more years of some seriously noisy data.
ISM, ECRI, Non-farm, Housing and alot of this stuff may be all over the map. My reasoning for this is because people and companies are spooked – and acting erratic. Hence, erratic data.
Just the the scene in Star Wars, when Luke turns off the radar scanner, maybe its time to discard the tarot cards of economic data and “Use the Force Luke…….”
In the movies it worked.
It’s a leading lagging indicator or is it a lagging leading indicator?
They are confusing, especially if you read the headlines that others write about them. I think they’re saying they don’t know which way it will go. Look at some parts from this piece; http://www.businesscycle.com/news/press/1936/ They spend a lot of time defending their record, but after the “Confirmation Bias” part it starts it gets pretty revealing;
There are a number of valid ways to describe ECRI’s leading indexes, but “conventional” is not one of them. In fact, the implicit suggestion that the WLI cannot be relied upon because “historical correlations… can’t be counted on” is revealing, and completely off-base – because the construction of ECRI’s leading indexes isn’t rooted in historical correlations or regressions, or in the back-fitting of data. This seems incomprehensible to most conventional economists – monetarists, Keynesians, and everybody in between – because the pseudo-science of econometrics is the only analytical approach they’ve ever been taught. Very few of our critics (or admirers, for that matter) appreciate the fact that we don’t use models because they are singularly unsuited to business cycle analysis – even though we’ve said this six ways to Sunday.
or this;
“A key danger of being wedded to any particular ideology or market view is confirmation bias – the tendency to selectively focus on evidence supporting what one already believes or wants to be true. The resultant lack of objectivity is an enemy of forecast accuracy. That’s why we don’t belong to any particular “camp,” accusations notwithstanding. When our objective leading indexes change cyclical direction, we change our view about the economy’s direction, period. As a result, we find ourselves being alternately feted and reviled by liberals and conservatives, bulls and bears, while we stick to our knitting.
Here is a statistical analysis that showed ecri is not a leading indicator. The original page is no longer on cxoadvisory.com.
http://webcache.googleusercontent.com/search?q=cache:r_2KazUO298J:www.cxoadvisory.com/economic-indicators/leading-economic-index-and-the-stock-market/+cxo+ECRI+site:www.cxoadvisory.com&cd=2&hl=en&ct=clnk&gl=us&client=firefox-a
How can there be any doubt which way this thing is going. Good grief. Home sales collapsing, car sales even with huge discounts down m-o-m sequential, payrolls going negative again, durable goods orders collapsing exaircraft sales, etc etc etc. 1 outlier ISM survey from July and everyone gets excited, even as every regional Fed survey shows contraction. Even Intel guided revenue lower. I read yesterday that the gvt as of month end August had racked up new net debt of 1.5 trillion. With 1 month to go to close the federal books.
Come on – even with all this massive liquidity creation, this is the best the economy can muster?
Who cares about the ecri, really. Not me. The facts are out there if you want them.
If ECRI states the blatantly obvious, their Wall Street, investment and banking industry customers will stop buying their product. The ECRI’s CEO Laks is just another smooth-talking snake oil salesman….and he knows customers don’t pay for bad news if it will cost them money.
I am having a hard time seeing how this isn’t merely a coincident indicator.
I’m viewing this through the same spectacles. Perfect leading indicators don’t exist, and ECRI is no exception.
Bruce,
Well said, my views exactly. There is no topline revenue growth from businesses, it has all been profits maintained primarily by firing people. Those of us that went through this in the 80′s remember it well. Now businesses have reached the point where firing more personnel will not maintain or increase their profits. To do that they must show growth, and there can be no growth in an environment where there is no demand. Working people don’t have any money and are trying to pay off their debts in case they are the next person to be let go. Those on unemployment are even worse off , and the actual number of unemployed is twice what the government tells us ( just one more false data point). So where is the money supposed to come from to create sustainable demand?