ECRI Watch: Improving!

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*** Further to my post below of earlier today, the ECRI weekly leading index has just been published, increasing to 122.6 for the week ending September 10 from an unrevised 122. The smoothed, annualized growth rate increased to -9.2% from an unrevised -10.1%. My expectation (at the bottom of the post) was for a decline of 9% to 9.5%. ***

The ECRI Weekly Indicator for the week ended September 3 came in at 122.0 compared to the previous week’s 120.5. The closely watched ECRI WLI Smoothed Annualised Growth Rate came in at -10.1% compared to -10.2% of the previous week. That compares to our forecast of “sharply lower”.

Following suggestions by some of my readers and a better than anticipated smoothed annualised growth number for the ECRI WLI published last week I revisited my indicators, as it turned out that the indicators tended to lead the former somewhat. With the algorithm for calculation of the smoothed annualised growth rate of the WLI unknown I ran a few tests and it became clear that I had to adjust my algorithms for the calculation of the smoothed annualised growth of the indicators.

As I indicated previously, the equity market can be seen as the most important contributor to the WLI as more than 80% of the smoothed annualised growth rate of the ECRI WLI can be explained by the smoothed annualised growth rate of the S&P 500.

Sources: Dismal Scientist; I-Net; Plexus Asset Management.

On my revised algorithm with no leads or lags the smoothed annualised growth rate of the S&P 500 points to a smoothed annualised growth rate of the WLI of approximately -10% for the week ended 10 September.

Sources: Dismal Scientist; I-Net; Plexus

However, my revised algorithm of the smoothed annualised growth rate of the yield on the US 10-year government bond index indicates further downward pressure on that of the WLI.

Sources: Dismal Scientist; FRED; Plexus Asset Management.

Sources: Dismal Scientist; FRED; Plexus Asset Management.

On the other hand, the adjusted smoothed annualised growth rate of initial jobless claims suggests an improvement in the annualised growth rate of the WLI.

Sources: Dismal Scientist; FRED; Plexus Asset Management.

Sources: Dismal Scientist; FRED; Plexus Asset Management.

One of my readers suggested that the JOC Industrial Price Index could be one of the factors ECRI used in the compilation of the WLI. As I do not have access to the JOC Price Index my research suggests that the Economist Metal Price Index is an excellent proxy of the former. His suggestion is correct if I consider the relationship between the smoothed annualised growth rate of the Economist Metal Price Index’s and that of the ECRI WLI smoothed annualised growth rate.

Sources: Dismal Scientist; I-Net; Plexus Asset Management.

For the week ended 10 September the smoothed annualised growth rate of the Economist Metal Price Index points to an improvement in the WLI smoothed annualised growth rate.

Sources: Dismal Scientist; I-Net; Plexus Asset Management.

Gauge of this week’s ECRI WLI Smoothed Annualised Growth rate based on the week ended 10 September 2010:

ComponentLast week 10 SeptemberPrevious week 3 September Momentum
Smoothed Annualised Growth
S&P 500-0.7%-1.6%Contraction moderating
10-year bond yield-45.0%-42.5%Weakened sharply
Economist Metals Index8.9%10.1%Increasing but moderating
Initial jobless claims*-6.6%-1.5%Increasingly positive
Conclusion
ECRI WLI -9% to -9.5%?-10.1%Improving

*Based on 450 000 initial claims

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3 comments to ECRI Watch: Improving!

  • steve wenstrup

    The ECRI has become largely coincident due to its stock Market components in a muted economic environment.

  • bob

    Hi,

    I struggle with how to interpret the smoothed rate of change with 10 year interest rates. Lower rates are a sign of lower economic growth yet lower rates stimulate the economy.

    So, I wonder how ECRI uses interest rates but my interpretation is that lower rates lead economic growth which seems to be contrary to your chart. But maybe I am wrong.

  • bob

    Response to Steve W;

    STEVE,

    Maybe it is coincident that SP500 tracks the ECRI over the short time span

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