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Can We Trust the Leading Economic Indicators?


Consider the different sides.


Leading economic indicators are soaring and inquiring minds are wondering if they signal a strong recovery in the works. First, let's consider the Bullish case from the ECRI.

Please consider US recovery 'unlikely to falter' anytime soon-ECRI.

Oct 2 (Reuters) -- An index of future US economic growth slipped in the latest week, but its yearly growth rate climbed to a new record high, indicating a smooth recovery in the near-term, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index slipped to 127.1 in the week to September 25 from an upwardly revised 127.9 the prior week, which was originally reported as 127.8.

Last week's figure marked a 60-week high.

The index's yearly growth rate rose to new all-time high of 25.1% in the latest reading from 24.3% the prior week.

"With WLI growth rising to yet another record high, the economic recovery is highly unlikely to falter in the next few months," said ECRI Managing Director Lakshman Achuthan.

Double Dip Recession Out of the Question

In August the ECRI said US double-dip recession "out of the question."

" 'With WLI growth continuing to surge through late summer, a double dip back into recession in the fourth quarter is simply out of the question,' said ECRI Managing Director Lakshman Achuthan, reinstating the group's recent warning to ignore negative analyst projections."

I'd agree that a slip back into recession in the fourth quarter is unlikely, assuming of course, it's even possible. Bear in mind, we haven't had an official end of this recession declared yet.

However, putting such a short-term target on things while telling people to "ignore negative analyst projections" is quite a bit over the top.

Strongest Recovery Since Early 1980s

Also in August, the ECRI declared US recovery may be strongest since early 1980s.

ECRI Says Inflation On Cusp of Upswing

In October, the ECRI issued an inflation warning. Please consider US inflation on 'cusp of cyclical upswing.'

Oct 2 (Reuters) -- A monthly gauge of US inflation pressures continued to rise in September to an 11-month high, suggesting an upswing in prices expected in an economic recovery, a research group said on Friday.

The Economic Cycle Research Institute's US Future Inflation Gauge (USFIG), designed to anticipate cyclical swings in the rate of inflation, rose to 90.6 in September from an upwardly revised 89.7 in August, which was originally reported at 89.6.

"The upturns in the USFIG and its components have become fairly pronounced, pervasive and persistent. Thus, while this is not yet a significant policy concern, US inflation is on the cusp of a cyclical upswing," said Lakshman Achuthan, managing director at ECRI.

Cusp of Inflation?

I'll gladly take the opposite side of the ECRI's inflation warning.

Yield Curve As Of 2009-10-08

Click to enlarge

Since June, the three-month T-Bill has floated near zero, while the 10-Year Treasury Note yield has fallen from 4 to 3.17, a huge 83 basis points flattening of the curve. This is certainly not what one would expect to see on the "cusp of inflation."

Unfortunately, we don't know the exact makeup of the ECRI's WLI (Weekly Leading Indicator's Index). After all, they're selling a proprietary service.

However, we do know from the ECRI's Business Cycle Glossary that "the well-known monthly Index of Leading Economic Indicators (LEI), originally developed by ECRI's founder, Geoffrey H. Moore, also oversaw the development of the WLI, which represents the latest in a long series of advances made since the introduction of the original LEI."

WLI is weekly while LEI is monthly.

Conference Board (LEI) Leading Economic Indicators

Click to enlarge

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