How does ECRI forecast turning points in the economy?

ECRI forecasts originate from our objective leading indexes of the business cycle. That’s because they have solid foundations, informed by the fundamental drivers of economic cycles, and have proven their worth over more than a century of economic cycles in the U.S. and in many other market-oriented economies.

Learn more about monitoring business cycles today.

Read excerpts from Beating the Business Cycle, by ECRI's co-founders.

What is the difference between business cycles, growth rate cycles, and inflation cycles?

Business cycles consist of the alternating periods of expansion and contraction in the level of economic activity experienced by market-oriented economies.

Even during periods when such economies do not exhibit business cycle contractions, an economy will exhibit growth rate cycles – alternating periods of upswings and downswings in the economy’s rate of growth.

Inflation cycles consist of alternating periods of rising and falling inflation. Inflation cycle downturns have a degree of correspondence with economic slowdowns, but sometimes begin before, rather than after, the start of a slowdown.

What is a composite index?

A composite index allows a wide range of data to be summarized without using an econometric model.

What is the difference between the leading, coincident, and lagging indexes?

An essential component of our institutional knowledge is our ability to identify leading, coincident, and lagging indicators of the business cycle.
Leading indicators consistently turn before the economy does.

Coincident indicators turn in step with the economy and track the business cycle’s progress.

Lagging indicators turn after the economy turns, and play a confirmatory role.

What are the components of ECRI's leading indexes?

The components of ECRI's composite indexes are proprietary, but through our reports and private meetings our clients are fully apprised of the “story” behind all of our cycle turning point calls. We also work directly with them to customize the integration of cycle risk management into their existing processes.

Is your China data any good?

Yes. We have established cycle chronologies for China and have been monitoring their cycles since last century. In fact, our array of specialized leading indexes for China avoid many data quality issues that plague most observers, allowing us to make bold calls regarding China’s cycles and policy responses.

Is your data revised?

Yes, to the extent some government data is revised.

However, the bottom line is that these routine revisions don't have a material impact on turning point timing forecasts, which is their primary purpose.

How does ECRI compare to the Conference Board LEI?

ECRI's founder, the late Geoffrey Moore, developed the original Leading Economic Index (LEI) almost half a century ago. This short excerpt from Beating the Business Cycle discuss the development of the original LEI. Check out the chart, originally published in The Wall Street Journal in April 2001, and please be sure to read the fine print below the chart.
The Economist also reported on the LEI's and ECRI's track records back in 2005, demonstrating that ECRI outperformed.
Of course, the proof is in the pudding. Please compare the following real-time April 2009 forecasts: ECRI "End of Recession this Summer" Vs. Conference Board “There’s no reason to think that this recession is going to end any time this spring or this summer.”

How does ECRI compare to the Austrian School?

The roots of our research tradition start well before the origins of the Austrian school and, indeed, predate the creation of the Federal Reserve. More than a century before the Fed came into being, there were clear business cycles in the U.S. economy, which cannot therefore be explained by the Austrian theory implicating central bank policies in the generation of booms and busts. In fact, half of the U.S. recessions that occurred between the late 1700s and the early 1900s turned into depressions without any help from a central bank.

Because credit is indeed a key driver of business cycles, our analytical framework subsumes credit cycles but extends well beyond such incomplete explanations to include other critical business cycle drivers that were in evidence before the creation of the Fed and indeed in many subsequent business cycles.

We appreciate the relevance of the Austrian theory to the current business cycle in view of the Fed’s actions following the 2001 recession, as well as its latest policies. But, as mentioned, this is included in our approach, which has broad conceptual and empirical roots that yield objective insights into the economic outlook.

How does ECRI compare to the OECD?

Nearly half a century ago, ECRI co-founder Geoffrey H. Moore pioneered the creation of international leading indexes. Almost a decade later, the Organisation for Economic Co-operation and Development (OECD) followed suit using a different statistical procedure. In addition, the components of their leading indexes – unlike ECRI’s – varied from country to country, based largely on historical back-fitting.


• The historical median leads of ECRI’s long leading indexes were at least three months greater than their OECD counterparts in the U.S. case, and at least four months more for Japan and Germany.

• OECD leading indexes are subject to more revision than ECRI indexes because, in addition to input data revisions, they are also revised due to monthly re-estimation of their components’ trends going back to the beginning of each time series. That is not true of ECRI’s indexes.

Both theoretically and empirically, ECRI’s leading indexes are superior to the corresponding OECD indexes. Furthermore, ECRI’s leading indexes are not limited to a single leading index of economic growth for each economy. Rather, we maintain multiple specialized leading indexes for each economy, and especially for the major economies, including China and India, for both of which we were the first to develop leading indexes.

More importantly, ECRI has been studying economic cycles – and forecasting recessions and recoveries – longer and more reliably than anyone, anywhere, and our methods aren’t taught anywhere in the world.

What is the recessionary window of vulnerability?

A “window of vulnerability” in the economic cycle is a period during which the cyclical drivers of the economy have weakened to the point where the economy is susceptible to a negative shock. Within that window of vulnerability, virtually any reasonable shock becomes a recessionary shock.

What are the lead times of your indexes?

In general, leading index lead times tend to be asymmetric, being longer at business cycle peaks (i.e., before recessions) and shorter at business cycle troughs (i.e., before recoveries). However, the lead times of leading index growth rates tend to be fairly symmetric, being more or less similar at growth rate cycle peaks and troughs (i.e., before downturns and upturns in economic growth, respectively).

While the actual leads vary to some extent from one turning point to the next, ECRI’s different leading indexes exhibit somewhat different leads:

• Long leading indexes typically lead turning points by around two to three quarters

• A “moderate” lead means the index typically leads turning points by around a couple of quarters

• Short leading indexes typically lead turning points by around one to two quarters

In 2011, you called for a recession that never happened - does that point to a flaw in your research?

We’ve looked at this question closely, and the answer is no.

Our directional call for a cyclical downturn in growth was correct, and the 2012-13 growth rate cycle downturn turned out to be the worst “non-recession” in over half a century. The reason it didn’t became a full-blown recession is because of something that’s unlikely to be repeated.

Most think it was the Fed’s actions (which reflected our assessment of cyclical risk) that prevented a recession, but our research shows that the real reason was the “Greater Moderation.”

Basically, U.S. economic cycle volatility collapsed, in large part because of a few years of very stable oil prices.

As the former head of BP’s global economics team noted in mid-2014, “the oil price has been above $100 for three years in a row, the highest … such period ever, but extremely stable, the lowest three-year volatility since 1970,” when prices were fixed. While there were supply disruptions, “[t]he cumulative level of these disruptions over the last three years is balanced almost one by one, almost barrel by barrel, by the increase in tight oil production in the U.S. So it’s an absolute fair statement to say [that] if we had only had the disruptions … you would have seen oil prices shooting up.”

Thus, despite a fairly normal pattern of supply disruptions, oil price volatility fell to a four-decade low in 2011-13, in large part, because of what’s been called the fastest ramp-up in oil production in history, creating an unusual period devoid of oil shocks.

In other words, the cyclical recessionary “window of vulnerability” was wide open, as shown by our leading indexes, but the oil shock didn’t happen despite the usual supply disruptions. The end result was the worst non-recession ever. And our leading indexes have correctly called the growth rate cycle upturns and downturns ever since.

What is your model?

We do not use models to make our cycle forecasts. Rather, we employ a robust leading indicator approach which is unrivaled in accurately calling turning points in economic growth and inflation worldwide. This is very different from mainstream economists, who base their forecasts on econometric models.

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"eerily accurate"
- National Public Radio
This approach works like a charm.
- Forbes Magazine
ECRI is perhaps the only organisation to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm. Jan. 2005
- The Economist
...a unique set of insights that made me able to cut through a lot of the noise in the market place... the tools ECRI provide in calling decelerating (or accelerating) growth is unmatched.
- ECRI Client
For ourselves, in this cycle, we'll line up with ECRI.
- Grant's Interest Rate Observer
In the opinion littered world of economic forecasting, ECRI is Mr. Spock - deeply analytical, dispassionate, and accurate.
- ECRI Client