ECRI Index – Weekly Leading Index (WLI) and Year-Over-Year Change (thru Week Ending Apr 6, 2012)

ECRI Index (also known as the ECRI Weekly Leading Index) is published weekly.  It is designed to predict the direction of economic growth in the next 6-9 months.  On this page, I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

(NOTE: I’ve decided to change one of the ways I analyze the trend in the ECRI Index.  According to the ECRI itself, the complicated method they use to give an “annual growth rate” for the index doesn’t do a great job of adjusting for seasonal patterns.  The best way to get around that is simply to compare the level of the index to one year prior.  Even better is to do a four-week moving average and then compare that to the four-week moving average for one year prior.  This should help give a better sense for what the ECRI Index is telling us.)

Quick ‘n Easy

The ECRI Weekly Leading Index is a weekly indicator that is designed to tell us how the economy will look 2-3 quarters (6-9 months) down the road.  We will use two ways of examining the index: 1) the weekly level of the index and 2) a smoothed version of how much the index has changed over the last year.

The Economic Cycle Research Institute (ECRI) does something very similar to the Leading Economic Index from The Conference Board, but they are not at all transparent about how they do their calculations.  We can only wait to see what they publish as their index level and see where it leaves us.  But many people believe this is a good leading indicator for the economy.

Specifically, we will focus on two components of the indicator:

  • Weekly Leading Index (WLI)  – This is the actual value of the index released each week.  It will change more rapidly than the growth rate measure mentioned below.
  • Weekly Leading Index Year-Over-Year Change in 4-Week Moving Average – Rather than using the ECRI’s complicated calculation for an annualized growth rate, which ECRI admits doesn’t do a great job of adjusting for seasonal patterns, it is easier to compare the level of the index to its level one year prior.  To smooth things out, we will do this using a four-week moving average.  So, it will be like asking, “What’s the difference between the average of the 1st four weeks of the index in 2012 versus the 1st four weeks of 2011?”
There are numerous other indicators that the ECRI uses to assess the future of the economy.  They have a paid client base for whom they reserve their most up-to-date forecasts, but the WLI is publicly available data that can provide some hints at the overall picture they are assessing.

Here is a graph of the ECRI Index (WLI) for the past year from ECRI:

ECRI Index - ECRI Weekly Leading Index Level Apr 6 2012

Source: BusinessCycle.com

And now, here is a graph of the year-over-year change of the 4-week moving average of the ECRI Index (WLI) from Doug Short’s blog:

ECRI Index - ECRI-WLI-YoY - Doug Short - Apr 6 2012

Courtesy: AdvisorPerspectives.com/DShort

ECRI Index Trends and Projections

Below, I will discuss whether the ECRI Index is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released.

ECRI Index Trend Analysis

Quick ‘n Easy

The ECRI Weekly Leading Index (WLI) level and year-over-year change in the 4-wk moving average are both in a confirmed rising trend, although the most recent reading of the index level was too low to be considered part of that trend.  The positive trend in this index goes against what the ECRI has stated in its own analysis of all its indicators, not just this publicly available one – that we are headed for a recession this year.

Here is a chart of the recent trends in both the index level and the year-over-year change of the 4-week moving average:

ECRI Index - Weekly Leading Index Level Apr 6 2012 - Trends

Source Data: BusinessCycle.com

ECRI Index - Weekly Leading Index YoY 4wk MA Apr 6 2012 - Trends

Source Data: BusinessCycle.com

 

ECRI Index Level ECRI Index Year-Over-Year Change of 4-wk Moving Average
Current Trend Feb 17 – Mar 30, 2012 – During this time, there was a confirmed uptrend, with a virtually 100% chance that the WLI was rising by 0.49 points per week.  The latest reading (Apr 6) was too low to be considered part of the rising trend, however.  The trend was not broken though. Feb 17 – Apr 6, 2012 – During this time, there was a confirmed uptrend, with a virtually 100% chance that the WLI Yr-over-Yr Change in 4-wk Mov Avg was rising by 0.25 percent each week.
Last Confirmed Trend Feb 3 – Feb 17, 2012 – During this time, the WLI was falling by 0.12 points per week.  (Note: I do not always go back and re-run old trends with revised numbers.) Jan 13 – Jan 27, 2012 – During this time, the WLI Yr-over-Yr Change in 4-wk Mov Avg was rising by 0.56 percent each week.  (Note: I do not always go back and re-run old trends with revised numbers.)
Projected Next Data Point(assumes recent trend continues, excluding any off trend data points) Week ending Apr 13, 2012: WLI expected to be 127.26 Week ending Apr 13, 2012: WLI Yr-over-Yr Change in 4-wk Mov Avg expected to be minus (-) 3.10 percent

Easy Take

The economic reports have been starting to look generally less favorable recently.  Fortunately, both the level of the ECRI Index and the comparisons to a year ago are both in rising (improving) trends, and they have been in that pattern since Feb 17.  But that doesn’t mean we’re in a good place – just that we’re moving in the right direction.  This week, the year-over-year change in the 4-week moving average was at its best (least bad) level since Dec 9, 2011, which is a still minus (-) 3.46 reading.

It’s fascinating that, despite what the trends look like in this leading index, ECRI itself published an article recently reaffirming its prediction that we are headed for a recession in the coming months.  There is some controversy though, as their prediction flies in the face of numerous other indexes and recession prediction models.  Still, the recent hints of a slowing economy would support ECRI’s notion.

The other thing to follow is that The Conference Board’s Leading Economic Indicators (LEI) has had five consecutive positive monthly changes since the ECRI’s prediction of a recession occurring before mid-2012.  It points to accelerating economic growth in the coming months.  Which of these two leading indicators will be correct?

NOTE: You may be reading an outdated analysis.  Please visit my latest ECRI Index trend analysis.

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