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Slowdown Call Came Long Ago

The bears’ favourite economic statistic of the moment keeps getting worse.

Economic Cycle Research Institute's Weekly Leading Index, which has been on a downward trend since the end of April, is at a 49-week low. Its annualized growth rate of negative 9.8 per cent is perilously close to a 10 per cent decline, which the pessimists note has always been accompanied by a recession.

Noted bear David Rosenberg of Gluskin Sheff + Associates Inc., who has made that point, says that after controlling for volatility, “our models say that ECRI is now saying two out of three chance for a double dip.”

The WLI, as ECRI calls it, has therefore become the new whipping boy for the bulls. The Wall Street Journal last week quoted a British economist as saying the WLI is “very sensitive to financial indicators … leaving it vulnerable to feedback loops from the markets.”

At Bank of Montreal, Senior Economist Michael Gregory, in a recent article called The Double-Talk in Double-Dip Speculation, said the Conference Board’s composite leading-indicator index points to continued expansion, and the WLI has only “25 per cent accuracy” since it’s been in negative territory 12 times, but on only three occasions did recession follow.

Lakshman Achuthan, managing director of ECRI, says the criticism has gone too far. The claim that the WLI is dominated by financial-market factors is “factually false.” (ECRI does not disclose the specific pieces of its indicators, but Mr. Achuthan describes the sweep as “housing to money to inventories to confidence.”)

Also, he notes, it’s not a simple positive-to-negative swing that forecasts a recession, making the BMO analysis oversimplified, he says. ECRI is looking for “pronounced, pervasive and persistent” changes in the WLI.

That being said, Mr. Achuthan isn’t necessarily siding with the bears. “They’ve latched onto the index as the greatest thing since sliced bread because it converges with their views – it’s gone down quite sharply,” he said. “It’s a very good leading indicator, but it’s not the Holy Grail of economic forecasting.”

Mr. Achuthan isn’t calling a recession yet, at least. He notes that while indeed, all negative 10 per cent readings have been coincident with a recession, there are two examples in older, unpublished monthly data where that did not come true, in 1951 and 1966. For now, he says, the data indicates slowdown, not recession.