A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



WLI on Cusp of Upturn

The same indicator that provided one of the earliest signals of a recession in 2001 is now providing signs of its end and of a recovery early in 2002.

The weekly leading index of the Economic Cycle Research Institute, which looks for turning points in economic cycles, has improved for nine straight weeks now and by one important measure showed its best performance since September 2000 in the week ended Dec. 21.

That timing is important, according to Anirvan Banerji, director of research at ECRI, because the weekly leading index "first began predicting the possibility of a recession in September 2000, before other such indicators. That was when we became convinced that the danger of recession was greater than inflation."

Later, "in March of 2001 the signals from the WLI were so strong, you couldn't escape the probability of recession," said Banerji.

Notably, the National Bureau of Economic Research has officially cited March 2001 as the starting date of this tenth postwar recession. The NBER, however, did not retroactively determine that start date until Dec. 13, 2001.

Thus, ECRI's weekly leading index really had led economic activity and its leadership role has received authoritative confirmation.

ECRI's preferred analytic measure is the percentage change for the latest week from its 52-week moving average. That measure was unchanged in the week ended Dec. 21, the first non-negative reading since September 2000, and compares with a recent low of minus-8.8% in the week ended Oct. 26.

Conclusions Still Tentative

There are three key characteristics of a turning point signal in the leading indicators, according to Banerji. "The signal must be pronounced, pervasive, and persistent."

"The recent performance of the index meets the first criteria," Banerji said. "The level of the index has now retraced roughly half of its recessionary decline."

"The improvement has also been broad-based, with virtually all of the seven components up.

The third criteria is persistence. The WLI has risen for nine straight weeks. "We're not quite there yet," said Banerji, noting that the median lead for the index at business cycle troughs is three months, compared with 10.5 months at business cycle peaks.

"As usual, at (business cycle) troughs, by the time you get strong support from an indicator, it may have already happened," Banerji said.

He showed some caution, noting that "there is no holy grail, you need to cover a number of indicators."

A decided advantage of the WLI, however, is its weekly frequency. This allows for more frequent monitoring of the unfolding economic process. "We don't have to compromise performance to get high frequency," said Banerji. "The proof is in the pudding, look how it has performed."