Despite a sharp decline in the ECRI Lakshman Achuthan, ECRI’s Managing Director believes the pessimism is unfounded. While he believes we are due for an economic slowdown he also believes the chatter of a double dip is unwarranted at this point (via Globe and Mail):
Lakshman Achuthan, managing director of ECRI, says the criticism has gone too far. The claim that the WLI is dominated by financial-market factors is “factually false.” (ECRI does not disclose the specific pieces of its indicators, but Mr. Achuthan describes the sweep as “housing to money to inventories to confidence.”)
Also, he notes, it’s not a simple positive-to-negative swing that forecasts a recession, making the BMO analysis oversimplified, he says. ECRI is looking for “pronounced, pervasive and persistent” changes in the WLI.
That being said, Mr. Achuthan isn’t necessarily siding with the bears. “They’ve latched onto the index as the greatest thing since sliced bread because it converges with their views – it’s gone down quite sharply,” he said. “It’s a very good leading indicator, but it’s not the Holy Grail of economic forecasting.”
Mr. Achuthan isn’t calling a recession yet, at least. He notes that while indeed, all negative 10 per cent readings have been coincident with a recession, there are two examples in older, unpublished monthly data where that did not come true, in 1951 and 1966. For now, he says, the data indicates slowdown, not recession.
Achuthan might not believe the economy will enter a technical double dip (despite strong historical evidence to the contrary), but then again who really cares? Economists are notorious for calling recessions late. The stats, however, regarding the equity markets and the ECRI’s performance are far more convincing – and they’re not good. Stocks have fallen 80% of the time following an ECRI peak.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.