While we deride forecasting for the purpose of investing, we understand that many people are curious about the state and trajectory of the economy for other important reasons. Among the cacophony of bullish exuberance it is difficult to distinguish signal from noise, so in an effort to confound over-optimism with facts, we would point you in the direction of the Economic Cycle Research Institute. As forecasting goes, ECRI is the exception that proves the rule.
The Economic Cycle Research Institute is alone in its perfect record of forecasting recessions. The Economist magazine noted in 2005, “ECRI is perhaps the only organisation to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm.” Since then they also successfully signaled the 2008 recession in advance, and perfectly timed the recovery.
From ECRI’s website:
Most forecasters use models that reduce a complex economy to a rigid set of largely backward-looking relationships. Simply put, they try to predict the near future based on what has happened in the recent past. This can work for a while – until the critical moment when a turning point approaches, and such models reliably fail. This is because extrapolating from the recent past is a sure-fire recipe for being surprised by the next turn.
ECRI’s cofounder, Geoffrey H. Moore created the standard suite of economic indices in 1950. These indices are still the standard indices issued monthly by the Bureau of Labour Statistics (BLS) in the United States. However, Moore abandoned the linear framework embraced by the BLS when he realized that these indices inevitably failed to identify the critical turns in economic activity.
ECRI’s current framework monitors more than a dozen proprietary leading indices of inflation, home prices, foreign trade, manufacturing, services, and sector-specific activity. More from their website:
The durable sequences linking the indicators we monitor allow us to make sense of the consistent patterns at cyclical turning points. They let us objectively sort through data about the economy, while filtering out the “noise.” Unlike econometric models, ECRI’s indexes are not based on data-fitting, and do not need to be tweaked or adjusted to account for new data or events.
This all sounds very fancy and technical, but what matters most is that they are among the very few who consistently get it right at the turns.
Lakshman Acuthan, ECRI’s current Chief Operations Officer and public spokesman, re-iterated his recession call on CNBC yesterday, with strong conviction. Some take-aways:
- Since September when they first sounded the recession alarm, all important economic data points have been getting worse, despite consensus optimism.
- GDP, consumption, personal incomes, corporate sales, and manufacturing data have all deteriorated, and when combined to form the Coincident Index, are at 21 month lows.
- Over the past 50 years, every time the Coincident Index has declined to this extend, a recession has followed in short order.
- The consensus forecast is optimistic, and people are feeling better, because of the unprecedented and coordinated efforts of global central banks, which have printed mountains of money.
- Similar to 2007 / 2008 where the recession began in December 2007 while oil went to $147 a barrel in June 2008 because central bank largesse was not being consumed for the purpose of commerce, but liquidity had to flow somewhere, so it went into commodities and emerging market stocks.
- The jobs picture has improved a little, but this is a lagging indicator. In fact, the jobs picture usually improves right into the jaws of a recession as we saw in 2001 and again in 2008.
- All of the leading indicators continue to confirm their recession call, which should materialize by mid-2012. It usually takes consensus economists about 6 months to realize they are in a recession, but stocks generally get it right sooner.
We would strongly encourage you to watch the full video below.