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 Points to Upturn

In reporting Tuesday that its index of leading indicators rose for the third straight month in December, the Conference Board added to evidence offered by another leading indicator gauge that recovery will be shortly underway in the U.S. economy.

The three-months-in-a-row increase in the Conference Board's index meets one rule of thumb condition of a near-term economic upturn. Indeed, the median lead of the index at cyclical troughs - the point where economic activity shifts from declining to increasing - is three months.

Meanwhile, the weekly leading index compiled by the Economic Cycle Research Institute has been rising since October and, in each of the first two weeks of this year, that index showed an increase over its 52-week moving average.

On this basis, the index was up 0.3% in the week ended Jan. 4 and up 0.9% in the week ended Jan. 11. As a result, "we are now clearly calling for an economic recovery by the end of the first quarter," said Anirvan Banerji, director of research at ECRI.

"The signs meet the test of being pronounced, pervasive, and persistent. Recovery is imminent."

Banerji points out that ECRI's weekly leading index also has a three-month lead time at business cycle upturns and that it also has a small standard deviation of 1.4 months. This means that the index is very reliable at business cycle upturns.

ECRI's index includes seven components, five of which are seldom if ever subject to revision.

Banerji agreed that since the index began its upturn in October, the recovery could start as early as January, but felt more comfortable, saying that the upturn "would occur by the end of the first quarter."

He hastened to add that "while a recovery is due, it looks like being not much of a recovery." Banerji agreed that there is a symmetry between the depth of a recession and the strength of a recovery - so, with the recession having been shallow, the recovery is expected to be lackluster.

ECRI was among the earliest to call for the 2001 recession when its weekly leading index began to signal a downturn in September 2000 and unambiguously called for recession in March 2001.

Just last month, the National Bureau of Economic Research retroactively stated that the recession started in March of 2001.