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ECRI Weekly Leading Index: WLI Growth Index Continues Decline In 2017

By Jill MislinskiMarket OverviewJul 16, 2017 02:36AM ET
www.investing.com/analysis/ecri-weekly-leading-index:-wli-growth-index-continues-decline-in-2017-200201329
ECRI Weekly Leading Index: WLI Growth Index Continues Decline In 2017
By Jill Mislinski   |  Jul 16, 2017 02:36AM ET
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Today's release of the publicly available data from ECRI puts its Weekly Leading Index (WLI) at 143.9, unchanged from the previous week. Year-over-year the four-week moving average of the indicator is now at 5.15%, down from 5.25% last week. The WLI Growth indicator is now at 2.4, also down from the previous week.

"China Trade Masks Key U.S. Gains"

Trade Balance
Trade Balance

ECRI's most recent headline article highlights the importance of breaking down the trade deficit to reveal the structural nature of the trend over time. Once the cyclical component of the trade deficit is stripped out, the structural remains and reveals interesting features. Despite the large trade deficit, the US has seen the trade surplus in services more than double since the recession. Read more

The ECRI Indicator Year-over-Year

Below is a chart of ECRI's smoothed year-over-year percent change since 2000 of their weekly leading index. The latest level is above where it was at the start of the last recession.

WLI YoY of the 4 week moving average
WLI YoY of the 4 week moving average

RecessionAlert has launched an alternative to ECRI's WLIg, the Weekly Leading Economic Indicator (WLEI), which uses 50 different time series from various categories, including the Corporate Bond Composite, Treasury Bond Composite, Stock Market Composite, Labor Market Composite, and Credit Market Composite. An interesting point to notice — back in 2011, ECRI made an erroneous recession call, while the WLEI did not trigger such a premature call. However, both indicators are now generally in agreement and moving in the same direction.

ECRI WLIg And The RecessionAlert WLI Since 2000
ECRI WLIg And The RecessionAlert WLI Since 2000

Appendix: A Closer Look at the ECRI Index

The first chart below shows the history of the Weekly Leading Index and highlights its current level.

WLI With Recessions
WLI With Recessions

For a better understanding of the relationship of the WLI level to recessions, the next chart shows the data series in terms of the percent-off the previous peak. In other words, new weekly highs register at 100%, with subsequent declines plotted accordingly.

WLI Peaks with months before Recessions
WLI Peaks with months before Recessions

As the chart above illustrates, only once has a recession ended without the index level achieving a new high -- the two recessions, commonly referred to as a "double-dip," in the early 1980s. We've exceeded the previously longest stretch between highs, which was from February 1973 to April 1978. But the index level rose steadily from the trough at the end of the 1973-1975 recession to reach its new high in 1978. The pattern in ECRI's indictor is quite different, and this has no doubt been a key factor in their business cycle analysis.

The WLIg Metric

The best known of ECRI's indexes is their growth calculation on the WLI. For a close look at this index in recent months, here's a snapshot of the data since 2000.

WLI Growth since 2000
WLI Growth since 2000

Now let's step back and examine the complete series available to the public, which dates from 1967. ECRI's WLIg metric has had a respectable record for forecasting recessions and rebounds therefrom. The next chart shows the correlation between the WLI, GDP, and recessions.

WLI Growth GDP And Recessions
WLI Growth GDP And Recessions

Year-over-Year Growth in the WLI

Here is a snapshot of the year-over-year growth of the WLI rather than ECRI's previously favored method of calculating the WLIg series from the underlying WLI (see the endnote below). Specifically, the chart immediately below is the year-over-year change in the 4-week moving average of the WLI. The red dots highlight the YoY value for the month when recessions began.

WLI Year-over-Year Of the 4 Week Moving Average
WLI Year-over-Year Of the 4 Week Moving Average

The WLI YoY has been in positive territory for over 52 weeks and is now at 5.15%, down from 5.25% last week. The latest level is higher than at the start of all of the last seven recessions.

Note: How to Calculate the Growth series from the Weekly Leading Index

ECRI's weekly Excel spreadsheet includes the WLI and the Growth series, but the latter is a series of values without the underlying calculations. After a collaborative effort by Franz Lischka, Georg Vrba, Dwaine van Vuuren and Kishor Bhatia to model the calculation, Georg discovered the actual formula in a 1999 article published by Anirvan Banerji, the Chief Research Officer at ECRI: " The three Ps: simple tools for monitoring economic cycles - pronounced, pervasive and persistent economic indicators."

Here is the formula:

"MA1" = 4 week moving average of the WLI
"MA2" = moving average of MA1 over the preceding 52 weeks
"n"= 52/26.5
"m"= 100
WLIg = [m*(MA1/MA2)^n] - m

ECRI Weekly Leading Index: WLI Growth Index Continues Decline In 2017
 

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ECRI Weekly Leading Index: WLI Growth Index Continues Decline In 2017

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George Steven
George Steven Jul 17, 2017 2:04AM GMT
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Great article. I have been following the ECRI index for the past few months based on previous article by Doug Short...The growth was at 10-12% in January. The sentiment indicators were a lot higher than the hard numbers earlier in the year.  The growth could fall below 0% by September which could trigger a recession watch... ..The USD index has been moving down along with this index.
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