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Tempest Brews In Data Teapot

Economists, traders and analysts are splitting mainly into two camps: slow growth versus double dip.

As they spar, one small index has come into the spotlight, and the focus on it has caused something of a backlash.

It's really a tempest in a teapot, though. The much larger issue is that investors and other economy-watchers shouldn't over-rely on one dataset to forecast the future.

The data point in question is the Economic Cycle Research Institute's weekly leading index. Some bears have latched onto its negative growth rate -- down 7.7% in the June 25 week -- as a sign of a double-dip recession. ECRI itself says the negative growth rate signals only a slowdown in growth, not an economic contraction.

Bank of America Merrill Lynch economist Neil Dutta thought too much emphasis was being placed on the WLI. In an economic commentary, he noted that leading indexes have a "spotty track record."

Thanks to revisions, leading indexes fit the business cycle after the fact better than before, said Dutta. In addition, he said the WLI relies too heavily on pricing data, including for stocks that can be influenced by factors -- such as the Gulf oil spill or flash trading -- that are outside of economic fundamentals.

Dutta respects the work of the ECRI, but said his piece was "a way to educate the investing public."

"Everyone is on pins and needles, with people pushing a certain view, hoping for a double dip," he said, and in his view the double-dippers were over-promoting the WLI to prove their pessimistic point.

ECRI's director, Lakshman Achuthan, wasn't available for comment. But the organization shot back on its website. It defended the WLI and dissed other forecasters, pointing to a study by the International Monetary Fund that found "the record of failure [among economists] to predict recessions is virtually unblemished." It even referenced "The Daily Show" to deride BofA.

In the genteel world of business economics where economists are reticent to criticize each other publicly, the exchange was a data smackdown. Never mind that both commentaries come to the same conclusion about the outlook: the U.S. economy is just slowing down, not falling back into recession.

There's an even more important point of agreement. Both commentaries argue that one data series can't accurately project the economy. There is no Holy Grail.

"When forecasting the economy's trajectory, we like to look at a wide array of indicators," wrote Dutta.

"We created the WLI not as an infallible, stand-alone recession-forecasting machine, but as one small part of a much larger array of leading indexes," wrote ECRI.

An inflection point in growth is hard to call because the forces of good and evil are seesawing for dominance. Looking ahead, an unexpected surge in export orders or a further drop in stock prices could tip the balance of growth up or down, respectively, in the second half.

Investors and other economy-watchers should take note. It is fine to have your favorite data series -- whether it is payrolls, industrial output or lipstick sales -- that you anxiously await every week or month. To get a true read on the economy, however, it is better to follow several reports that cover a range of sectors.

Kathleen Madigan is the primary author of the Big Picture column. This column originally appeared on Dow Jones Newswires.