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Leading Indicators Head South: Are They Right?
From The Daily Capitalist
I have been following leading indicators for a while and today David Rosenberg ran some forecasts from his favorite leading indicator measure, the Economic Cycle Research Institutes's (ECRI) Weekly Leading Index (WLI). Their chief economist, Lakshman Achuthan, is frequently seen on CNBC's programs. His WLI is turning down and has been for a while.
Rosenberg said:
The growth rate on the ECRI leading index did it again! It sank further into negative terrain, now at -9.8% during the week ending July 9, down from -9.1% the prior week. This was the tenth deterioration in a row and the growth index is now negative for six straight weeks. We have never failed to have a recession with the ECRI at current levels but there is also inherent volatility in the index that requires acknowledgment. Our reckoning is that in the past few weeks, the index has gone from pricing in even-odds of a double-dip to two-in-three odds. It may take a while, but Mr. Market will figure it out before long.
I've been forecasting a downturn for some time but for more fundamental reasons, but the data seem to be bearing me out. Rosenberg does make an excellent point in his analysis in that his detractors point out that such "double-dips" have been rather rare events in a recovery (my emphasis added):
These “extremely rare” events have been the norm for the past 24 months: negative nominal GDP growth; negative operating earnings; a massive contraction in credit; a 30% slide in home prices (these same economists — Bernanke too — were telling everyone that home prices never deflate over a 12-month time span ... but they did this time!); a record-high duration of unemployment.
The past 24 months have given us a lifetime of “extremely rare” events, but as we suggested last week, these are only “rare” from the perspective of an analyst that sees the past 24 months as a typical post-WW2 recession.
Economists always look backward and then interpret data. They rely on historical data to make and justify their positions. This is what almost all economists do and they generally don't have a very good track record. The reason is, is that the data they choose is either incorrect, insufficient, or based on the wrong economic theories.
My position is that while historical data may have some value in interpreting past events, it is not very useful in predicting future economic events. You can't look back to other cycles and say, "since X happened in 1982, and the charts look similar today, that X will happen in 2010." The best way to look at the economy is with a thorough understanding of business cycle theory and try to interpret today's events in that light. It's not easy, and, as Dr. Athreya, the Fed economist who trashed bloggers said, "one has to think hard about many, many things."
I'm not saying I don't look at data; I do. What I'm saying is that the data doesn't drive my ideas. At best data is only good for broad brush analysis which is what I try to do. Data can prove me or anyone wrong however. By the way, Rosenberg may complain about his critics, but he does the same thing as they do (leads his analysis with data), only his "hunches" have been better than theirs. Also he dares to interpret data to predict markets behavior and he's pretty good at it I believe. I don't do this because I have no clue what the market will do tomorrow.
I recently began following the Consumer Metrics Institute's data (they were kind enough to send it to me). They have their own proprietary data to look at leading indicators, but generally they are based on actual consumer purchases, primarily of durable goods. They ignore things like food and gasoline, because those are things we have to buy, and are not discretionary. Their growth indicator has been declining since October, 2009 and went negative in January 2010.
What this shows is that they lead the next GDP decline by about three months. Note that BEA data is slow in coming, and is often revised two times over several months, whereas Consumer Metrics claims that their data is current.
Look at this chart they did on cyclical contractions:
One measure of the true severity of an economic slowdown is the 'area under the curve' (or 'above' the curve in this case) swept out by the 'Daily Growth Index' over time. This area is just the average magnitude of the decline times the duration of the contraction event. During the 2006 slowdown this area was about 136 percentage-days of contraction, while the 2008 event was much more severe at 793 percentage-days. The 2010 event has now reached 288 percentage-days, over twice the severity of 2006 and well over a third of 2008 'Great Recession' -- and it is still growing.
The key point to notice in the above chart is that if the current 2010 curve continues its current course, in about 20 days the 2010 slowdown will be more severe on a day-to-day basis than the 2008 'Great Recession' was at the same point in its respective evolution. Unless the economy begins to pick up quickly, a double dip is likely -- with the second round milder but lingering longer than the first.
Of course, the important word in the above quote is "if."
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blah, blah, blah ....I've been short since everyone started predicting this fraudulent manipulated market was going down Labor Day 2008...The Fed and its surrogates have pumped $trillions into the market and will pump trillions more into the market ...when the market crashes and reality sets in...the cost of US debt will be unsustainable, then the bond market will crash...the Fed will NOT allow the market to go lower then 9500....they have bet the farm on their flawed policy and will kill the dollar before they allow the market to crash...it's all a fraud...I just cant figure out the timing to bet the fraud....
to those to excellent indicators one might also add Shadowstat's John William's M3 metric, which has been in free fall...
That is some nasty feedback.
my Cows went for record price at auction. Last week a couple of my 400 pound calves went for $1.40 and $1.50 a pound at the east Texas cattle auction. We have never gotten over $1.10 a pound over the years and most of the time in the 90 cent to one dollar range. The local cowmen I talked to were taken back at the prices, but herds are down due to feed prices and bad weather. This may not impact any index, but the price for your back yard BBQ is going up.
Maybe it's all those steaks they're eating in NYC because of their fat bonuses in Q1? See Fed Funds Restaurant Recovery, my almost tongue-in-check take on spending NYC.
Yep. The ol' boy I buy my beef from told me a month ago calves were going up. Of course, I had already bought into a cow for this years beef (it's in the freezer now). I expect I'll pay more next spring for a cow, just like everything else.
Sort of like "technical analysis"...basing your trading or stock picks on yesterday's (almost irrelevant) data and market disposition........every day, every year, is different. Economics is NOT a science.
Ooooh, doggies. Round and round, up and down.
Wheeee! This investing stuff is fun.
With apologies to the Mogambo.....
"Unless the economy begins to pick up quickly, a double dip is likely -- with the second round milder but lingering longer than the first."
In other words, this recession is going to be VL shaped, right? Well, I´ve been saying this for 2 years already.
Looking at past behavior and trying to extrapolate into the future is one of the key failings of the science that is economics. Each business cycle is different, and has a whole host of different factors at work. Plus, there's been an incredible demographic and technological cycle at work from 1945 to 2005 (not exact figures). That technology includes the pervasive use of consumer credit and financial engineering, including credit scores, credit ratings, derivatives, etc., etc. All of these things have created some prosperity, but also has masked a huge ramp in debt across all levels of the economy. Much of the 'increase' in living standards has come at the expense of higher debt levels. You can't assume that there won't be a reckoning or that this will be able to continue forever.
I've never had someone be able to explain to me how we will be able to "grow" our way out of all of this debt. They typically just change the subject.
Of course, it seems ppl still want their AAPL's....
Stuff you dont see in any lamestream media.
Obviously not. The market said so with todays nutty prop. So if the market says no, who are we to argue?
P.S. Where's the vommit icon?
Actually, most economic models exclude real-world events. This is why economists have had such an abysmal forecasting record for the last few years. Real-world events are excluded from economic models, which is why virtually no economist, other than Steve Keen and about ten others, is able to accurately describe or model what is happening in the world economy.
It is, however, intuitive. If everybody borrows a lot of money to consume, the economy looks good for awhile, until everybody has to pay the money back. Then, consumption drops back because the borrowing stops, and consumption falls even further because money is diverted from consumption to debt repayment.
Excessive debt is what induces economic depressions. It really is that simple...
According to a friend of mine, economists are god's gift to weathermen so that the weatherman could have a group that has a lower precentage of correct forecasting.
Gave me a good laugh!! Thanks Milestones
Super article, now were do we go from here? Gold? oil? Commods? pick up RE cheap?
That darned "D" word, everybody knows, but nobody dares to say it.