ECRI Sticks With Recession Call

The ECRI is sticking with its "US is already in recession" call based on four coincident indicators. Very few agree, but for what it's worth (perhaps nothing) I am one of those in agreement.

Here is a Bloomberg video to consider.

Also consider The Tell-Tale Chart by the ECRI.
Following our September 2011 recession call, we clarified its likely timing in December 2011. Based on the historical lead times of ECRI’s leading indexes, we concluded that, if it didn’t start in the first quarter of 2012, it was very likely to begin by mid-year.

But we also made it clear at the time that you wouldn’t know whether or not we were wrong until the end of 2012. And so it’s interesting to note the rush to judgment by a number of analysts, already asserting that we were wrong.

So, with about a month to go before year-end, what do the hard data tell us about where we are in the business cycle? Reviewing the indicators used to officially decide U.S. recession dates, it looks like the recession began around July 2012. This is because, in retrospect, three of those four coincident indicators – the broad measures of production, income, employment and sales – saw their high points in July (vertical red line in chart), with only employment still rising.

If you look at the size of the simultaneous declines in industrial production and personal income since July, that combination has never occurred outside a recessionary context in over half a century – but it’s occurred in every recession. This leads us to conclude that we are most likely already in a recession that began around mid-2012.

Now, please remember that, following our recession call, central banks really ramped up their efforts, and have literally been pumping more money into the economy than at any time in the history of humanity – and this is the upshot. No wonder the Fed is now all in.

So how come hardly anybody recognizes the recession? Perhaps it’s because of real-time data showing positive growth in GDP and jobs, and the lack of a recent salient shock.
Revisionist History

Some of that is revisionist history, notably the idea that in September 2011, the ECRI gave itself until December of 2012 to be proven correct. Rather, the ECRI kept changing dates waiting for data to match its call.

I have no problems with errors. I do have problems with revisionist history.

ECRI revisionist history wipes away an error in the other direction in 2007, claiming to predict a recession it clearly did not predict.

I presented an analysis at the time of the ECRI's September 2011 recession call in ECRI Calls Recession Based on "Contagion in Forward Indicators"; Just How Timely is the Call?
The revisionist history in regards to "no misses" is plain to see. The ECRI totally blew the call in 2007 and early 2008. That is not the galling part. Calls are easy to miss. The galling part is the ECRI's revisionist history related to the blown call.

The ECRI's integrity will remain in question as long as it continues to perpetuate the myth of a perfect record. The simple fact of the matter is no one has a perfect track record at calling recessions, interest rates, the stock market or anything else.
Flashback November 2007 ECRI Vol. XII, No. 11: Weakness In Leading Indicators Not Yet Recessionary

Please consider the following image snip. Highlighting is mine.

One month later the US was in recession, and in galling revisionist history the ECRI later referred to that highlight in yellow as "predicting" a recession, even though on Friday, January 25, 2008
ECRI Says There Is A Window of Opportunity for the US Economy

The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI’s Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession. ....

This is why, having correctly predicted the last two recessions in real time without crying wolf in between, we are not forecasting one yet.

Achuthan Winging It or Sticking to His Model?

Clearly the ECRI failed to predict the 2007 recession on time. I am now wondering "Did the 2007 miss influence an ECRI to jump the gun in the opposite direction this time?"

That line of questioning has me further wondering if Achuthan has been winging it based on coincident indicators and his personal opinion of what is likely, instead of simply following his own model (with a track record of claims based on leading indicators, not coincident ones).

Regardless, the ECRI claim to have never missed a recession is inaccurate twice (2007 and 2011) even if the ECRI has the call correct now.

Revisionist history aside, I do believe Lakshman Achuthan has the call correct. Today's GDP revision higher does little to change that belief. Contrary to popular belief, recessions frequently start with positive GDP typically revised lower much later.

Mike "Mish" Shedlock


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