ECRI Leading Economic Index Drops To 44 Week Low, Predicts Massive Economic Contraction

Tyler Durden's picture

David Rosenberg's favorite leading indicator, the Economic Cycle Research Institute (ECRI) Leading Index, fell to 123.2 in the week ended June 4, down from 124 the week before, a -3.5% annualized contraction: the first time this has gone negative in over a year. This is the lowest level since July 31, 2009, when it was at 122.4, as the chart below demonstrates.

What is more troubling is a historical comparison to the dark days of the 1970's recession. While the amplitude of the recent pick up has been unprecedented, from -30 to +30, it is only mirrored by the -20 to +20 jump seen in 1971-1973. However, as can also be seen below, the ensuing crash following the first spike, was the worst one in the past 35 years. If history is any predictor, does the ECRI Leading Indicator index anticipate a comparable collapse in the economy to what was seen in late 2008?

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
macfly's picture

Hell, I just wanted unicorns, sunshine, and house music all night long!

Mark of Zerro's picture

q: "If history is any predictor, does the ECRI Leading Indicator index anticipate a comparable collapse in the economy to what was seen in late 2008?"

a:  Yup.



jeff montanye's picture

however note the very substantial recovery in the index following its initial foray into negative territory.  

HarryWanger's picture

Hmm...don't know what to really extrapolate from this other than its getting back to the mean. Need to see next month to really determine where this is heading. Could actually stabilize like it has historically at the mean. We'll see.

AR15AU's picture

Your chart reading ability is lacking...  Can you not see the velocity?

economicmorphine's picture

Yeah, if I had next month's chart I could probably tell you where we're heading too.  

RockyRacoon's picture

Where's the Scary Clown Dude now?  Shouldn't he be predicting this stuff?

Oh, that's right, we'll hear about how accurate he was when the smoke clears.

He never did post that chart  predicting my bowel movements as requested.

mephisto's picture

How about this - previous years in which the index has been this low




none of which I remember as particularly productive, peaceful years in the equity markets.

jeff montanye's picture

1991 and 1998 were each + 26% or so for the spx.  possibly not peaceful though.

sawyer's picture

I guess one's need to be a member to get this week's reading?

spinone's picture

The rebound was a stimulus driven sugar high.  Now that the stimulus is wearing off, its dropping again. We need another, bigger dose of sugar.  Sweet, sweet sugar.


Here is a little song I dedicate to "sugar daddy" Bernanke

EscapeKey's picture

We need a bigger, and bigger stimulus, thus solving the problem once and for all.

GNH's picture

Solving the problem = Killing the system.  If the bigger stimulus is QE2 ($5T+), the anticipated currency crisis ensues, system will crash.  So, you're right.

mtomato2's picture

Man.  Great song.  Remember when Watergate was considered a scandal?


Good times...


I especially love the single snare and crash.


Thanks.  Makes me want to get a transistor radio and a jean jacket and lie down in the park.  Maybe play a little frisbee.

doomandbloom's picture

why u so pessimistic Tyler?...look at Leo...

oklaboy's picture

dddadum dumpdumpdump...  we need a bigger boat

Mr Lennon Hendrix's picture

The Silver Argaunaut is quick and nimble.  We are already offshore.  We search for new lands.

Mr Lennon Hendrix's picture

Well maybe the Hollywood Futures will give hope to a new bubble next week.  Oh this bubble economy is disgusting.

Mikebrah's picture

The highlighted '70-74 time period would indicate the ECRI is bottoming here and has another three years of growth before retesting the early 2009 lows.


This doesn't fit with the ZH mantra so I'm curious why the comparison is being highlighted.

hambone's picture

Perma bear I am, I hate to agree but seems Mikebrah has a fair point...the chart showed multi year stabilizing before the 2nd downturn.  If we follow this logic it says we'd continue stabilizing til...2012!!!  Damn Mayan's were right after all.

spartan117's picture

Well, doom in 2010 or 2012.  Doesn't matter when it occurs so long as the result is the same.  Look at it this way, we have about 2 years to prepare.  One interesting thing I noticed is that the intensity of the 2008 drop was much more severe than the 70-74 drop.  We're in for a world of hurt.

Joe Shmoe's picture

I think you raise a good point.  But, we didn't have HFT then.  So maybe the time frame would be compressed?

mtomato2's picture

Technology makes bad things happen even faster.

jeff montanye's picture

all interesting points.  however the recession of 1970 was but the first squeeze by the fed to slow the gathering inflation that would characterize the decade to come.  it was not the end of a credit cycle dating from at least three decades prior if not six, seven or eight.  if the question is do you buy puts in quantity, the answer is possibly not yes.  but if the question is do you buy stocks in quantity the answer probably is no.

Hungry For Knowledge's picture

THe top chart, with its shorter time frame of measurement (10 years), allows one to see the actual slope of the descending line.....based on that "slope" in prior downturns, and the negative momentum we have now to fall from such high heights, IMO, I believe that it will be at -20 within 4 weeks.

Consumer Metrics Institute

shows a daily chart of consumer consumption/spending, and it has yet to show a bottom - just a long, slow slide down.  Their metrics of many areas of consumer spending in the US are not behaving in any way like previous slowdowns, according to their numbers - whereas other recoveries have bottomed after a period of time, this one is showing no bottom forming...just data points moving slowly down day by day.

US Government Leading Economic Indicators, being approx 6 months behind more "real time" indicators like the aforementioned two, "tipped over" in recent months.

The downward fall will be fought, but it's coming, as exposed by the real activity numbers.

cainhoy's picture

coming soon to a theatre near you.

Thorny Xi's picture

Economy, Schmeconomy.  But you have to watch BP's version of "Black Water!"

plocequ1's picture

Too many indicators. There is a new indicator that traders go by. It is called the WGAF Indicator. (WGAF= Who gives a fuck)

WeeWilly's picture

The WGAF indicator closely tracks the FUBAR (fucked up beyond all recognition) indicator. That one is skyrocketing!!

Tarheel's picture

this seems like an obscure indicator

SwapThis's picture
WLI Drops, But No Double-Dip Yet

June 11, 2010

(Barron's) - The Economic Cycle Research Institute today offered up its view of last week’s “weekly leading indicators,” a closely watched private mailing, today showed a dip in the indicator for the week ended last Friday to 123.2, a decline of 3.5%, in contrast to the 0.3% rise the preceding week.

The Institute’s Lakshman Achuthan, however, remarked that “While the plunge in WLI growth to a one-year low assures a significant slowing in U.S. economic growth in the coming months, the recent weakness has not lasted long enough to signal a new recession threat.”

The ECRI notice follows better-than-expected consumer confidence data this morning from the University of Michigan, but also a smaller-than-expected gain in business inventories in Apri, this morning’s weak retail sales data for May and, of course, last Friday’s disappointing jobs number.

---  Looking at that chart, I wonder how soon the hard questions, like the implied velocity of the change and estimated downside target for this measure, are asked of Mr Achuthan, a regular on CNBC/Bloomberg. Steve Liesman?  no way he brings this up. The chart speaks for itself though.  This cannot be good.  I do hope Tom Keene has the balls to ask him about it though, maybe somebody can convince me this isnt as bad as it looks.


Leo Kolivakis's picture

You guys are reading way too much into the ECRI's drop:

U.S. Watch

The Economic Cycle Research Institute (ECRI) weekly leading index (WLI) of GDP growth in the U.S. registered a fourth decline in a row at the end of May, reaching a 43-week low. Some market participants have argued that this greatly increases the likelihood of a “double dip” scenario in the U.S. We do not agree. First, the growth rate of the WLI on a three month basis is volatile and often leads to false signals even in an expansion phase. Second, the institute is also far from drawing this conclusion: “There is no strict meaning for each value of the growth rate of the WLI…what is important is whether the move is significant according to the « 3 Ps » criteria (how pronounced, persistent and pervasive is the rise/fall compared to past cyclical moves)’’. As today’s Hot Chart shows, the growth in the smoothed WLI  has decelerated to zero but this phenomenon has been observed in each of the past recoveries without any exception (green arrows). Therefore, the recent trend in the WLI does not necessarily reflect an imminent weakness in activity. In order to call a recession, the smoothed WLI needs to be negative and for a long period of time. Needless to say we prefer the slope of the yield curve as a leading indicator of a possible downturn. At +240 basis points, the odds of a double dip scenario are very low. Before crying wolf, at least give the Fed a chance to start normalizing monetary policy. Right now, real rates are still in the abyss.

Joe Shmoe's picture

Looks to me like we have two of the three p's they say they need: pronounced and pervasive.  All we need, according to the article you posted, is pervasive. And, before we go putting too much on this ECRI quote, last week on Bloomberg, ECRI's spokesman said that the JOCSIND commodities index trend is very negative and that we have to get used to it.  I like your style Leo, but I think your half-full glass has only a third in it.

ghostfaceinvestah's picture

Hasn't the yield curve in Japan been positive for decades?

jeff montanye's picture

ghost i think you make an excellent point.  the u.s. positive/negative yield curve history is biased, imo, by the prevalence of fed-desired slow downs/recessions.  this is clearly not fed desired.  but might it still be a slow down/recession based on economic forces more powerful than the (fiscally strapped, short-term interest rate reduction spent) u.s. govt/treserve?  very possibly.

Hungry For Knowledge's picture

WIth all due respect, economists look at slopes of lines more that just absolute values (ie, how did we get to a -3.4% reading?  At a leisurely pace, or an almost frantic, direct drop from substantially higher levels......look at the slope, Leo.  It's almost vertical negative slope for several months.  Prior years had a gentle downdraft (seen in the top 10 year historical chart).  The slope of this line is what I would call a "negative parabolic curve"

SwapThis's picture

Another interestin

g chart, via David Rosenberg

The ECRI not only leads but is also more timely than the ISM since the data are released weekly and the index covers the whole economy, not just manufacturing.

We divided the ECRI into four different phases:

1. From the trough to zero (coming out of recession).
2. From zero to the peak (“sweet spot” of the cycle — from the end of the recession to the cycle peak in growth).
3. From the peak back to zero (past the peak in growth; economy slows but not back in recession).
4. Zero back to the negative trough (heading back into recession).

Sure looks to me we are going to go significantly below zero Leo, do you disagree?

Rick64's picture

Before crying wolf, at least give the Fed a chance to start normalizing monetary policy. Right now, real rates are still in the abyss.

 The FED? Yea they got a good track record. How many chances do they want this time?

Assetman's picture

Before crying wolf, at least give the Fed a chance to start normalizing monetary policy. Right now, real rates are still in the abyss.

Real rates have been in the abyss for over 15 months now... and we're getting a leading indicators that are PLUNGING.

Either those indicators are going to turn around any day now... or the extreme "liquidity" measures taken by the Fed over the last 15 months are wearing off-- big-time.

Either way, we're in for slower economic activity... and reduced profit expectations.

ghostfaceinvestah's picture

Right on.  Note that a lot of economic indicators, including the stock market, started heading down once QE1 was starting to wrap up - the MBS program "ended" in March, but a lot of MBS still settled in April and May (and a tiny bit is still settling).

Bottom line is, without the Fed pumping cash into the economy, it will whither on the vine as debt deflation takes over.

QE2 is a near certainty, the only uncertainty is the timing and magnitude.

chinaguy's picture

"QE2 is a near certainty"......go long financials?

Leo Kolivakis's picture

Slower growth, yes, but not a double-dip recession. Learn to distinguish between a recession, and a moderation of growth.

Hungry For Knowledge's picture

growth is now negative, at -3.4%.  That is a precursor to negative GDP growth, negative earnings growth, as the readings are now truly negative (not just "slowing").


Assetman's picture

Every lower data point on the ECRI increases the chances of a double dip, Leo.

I'm way ahead of you on the difference between a moderation of growth and a recession.  In many cases, the former leads to the latter.  Unless the weekly readings on the ECRI change for the better real soon, a double dip is pretty much guaranteed.

You might want to learn that linkage, dude. 

AndrewWJewell's picture

horay, Leo is here and is too amazingly, he's seemed to turn bullish; all aboard ....... Rock on Leo

Snidley Whipsnae's picture

" Before crying wolf, at least give the Fed a chance to start normalizing monetary policy. Right now, real rates are still in the abyss."

...and real rates are going to remain in the abyss for a long, long time. Think about what would happen to the FIRE sector if rates were raised a couple of percentage points.

...and consider how many more mortgages would be instantly under water.

...would Obama's plan to double exports be helped by raising rates a couple of percent.

...if you think there is any chance of a Fed rate hike in the next couple of years you should send me some of whatever you are ingesting or inhaling...thanks in advance.