Comstock Partners, Inc.September 16, 2010
More On The ECRI Leading Indicator
Last week, toward the end of our comment on consumer deleveraging, we mentioned that the year-over-year change in the ECRI Weekly Leading Indicator had strongly suggested the distinct possibility of recession. In answer to some questions about it, we would like to provide a bit more detail this week.
When we were writing last week the latest release showed the indicator declining 4.11% from a year earlier. We therefore searched the historical data to determine what happened to the economy at other times when the indicator had fallen by that amount or more. We found that over the last 42 years this has occurred seven times, and in all seven instances a recession started shortly before or after the signal. This week we re-examined the data, except that this time we looked for a decline of 3.50% or more, and found that the lead times were even better in four of the seven occurrences.
We can make a number of observations from the data. In all seven instances where the index fell 3.5% or more from a year earlier a recession occurred shortly before or after the signal. There were no occasions where the index declined 3.5% without a recession. In two cases the signal led the recession, in three cases it followed, and two times it occurred in the same month. It ranged between a five-month lead and four-month lag. The average and median lead times were zero. In all instances the market had peaked before the signal, anywhere from one to ten months, with an average of five and a median of two. We note again that ECRI Managing Director Lakshman Achuthan has not officially called a recession, although he has stated that, based on his indicator, there was more than a 50% chance of one.
Although we would not rely on any single indicator to form an opinion, the ECRI Leading Index strongly supports our view as discussed extensively in prior comments that the economy, at best is headed for a severe slowdown, and, at worst, another recession. It also makes it much more likely that the April peak in the S&P 500 will turn out to be the 2010 high, and that the performance of the economy in the period ahead will be highly disappointing to investors looking for a normal economic recovery.