Our Approach
The Challenge
Economic forecasting deserves its bad reputation in predicting recessions and recoveries. As a 63-country IMF study concluded, "The record of failure to predict recessions is virtually unblemished."
This failure results from the approach used by most economists extrapolating economic trends—a sure recipe for being surprised by the next turn. This is because, as we approach economic turning points, by definition, the trend changes.
A Better Way
There is a better way. By using ECRI's approach, which focuses on the arrays of the best cyclical indicators, it is possible to tell clearly and objectively when a turn in the cycle lies ahead.
Unlike econometric models that project from past trends, these cyclical indicators are specifically designed to predict future changes in the direction of the economy. They turn before the economy does. The focus is on the timing of a change in direction (see chart below).
But even the best leading indicators sometimes give conflicting signals. The key is to glean from their collective wisdom the signal that the economy is headed for a turn. This is why ECRI develops composite indexes of leading indicators using state-of-the-art proprietary techniques.
However, even a single composite index is not enough for the purpose. To monitor just the U.S. economy, ECRI uses an array of 19 specialized leading indexes in the context of an "economic cycle cube" covering various sectors and aspects of the economy (see chart below).
Using similar frameworks, ECRI regularly monitors over a hundred proprietary indexes to monitor the global economy. Thus, this approach is designed explicitly to monitor the global economy and its interaction with national economies.
Because ECRI uses separate leading indexes to track the various aspects of each economy, they do not need to be re-jiggered every time the economy’s performance deviates from standard economic theory. In the U.S., such episodes include the sustained period of non-inflationary growth during late 1990s boom, and the job-loss recovery that followed the 2001 recession.
Our selection of leading index components is rooted in an understanding of the key drivers of the business cycle, rather than in data fitting. The emphasis is on the development of leading indexes that hold up in spite of structural changes, using models that do not depend on standard simplifying assumptions.
Finally, ECRI's independence is ensured by its reliance on a broad clientele for research funding. This has also allowed ECRI to pioneer a trailblazing approach to turning point prediction, without being constrained by dominant academic paradigms.
The result is ECRI's unique ability to predict turning points in the economy. In fact, those capabilities complement standard forecasting methods, which have other strengths.
ECRI's forecasting approach is described in detail in their book, Beating the Business Cycle. Click to download a sample chapter from the book.