The ECRI Weekly Leading Index (WLI)

Click here to see our other update on the ECRI WLI.  It has our most recent update on the ECRI.

A large decline below zero in the ECRI Index Chart is said to be a leading indicator of a recession.  What’s it mean for the stock market?

WLI ECRI

As a professional trader and financial adviser to my clients, I am always studying every data set I can get my hands on.  This is one of them.

Data frequency is a big concern.  i.e. There are some data sets I can get every second of every day.  I use those for intra day trading.  There are some thata come out at the end of the day.  I use those for my daily adjustments.  And there are those, like this, that come out weekly.  I use those for big picture views on the stock market.

There is also data that comes out monthly.  I do not use any monthly data (except maybe looking at a monthly stock charts for historical perspectives).

The WLI  is updated every Friday with data through the previous week, making it is more responsive than the monthly Index of Leading Economic Indicators (LEI), originally developed by ECRI’s founder, Geoffrey H. Moore, for the U.S. Commerce Department.

One issue I have with this data is that when the ECRI issues updates to their data, they periodically revise the previous data set.  I do not allow adjustments in my collection of their data.  To me, a market timer, that’s not fair.  Hindsight is the enemy of the stock trader.  It’d be like me adjusting my indicators for the previous week and telling my clients that they should have heeded that signal – even though it wasn’t issued.  I am not sure why they do this.

Here are the various selling points from the ECRI’s site:

Frequency – the WLI is available every week, rather than monthly, allowing for closer monitoring of the U.S. economic cycle.

Promptness – the WLI is extremely prompt. Each Friday the WLI is updated through the previous Friday, i.e., there is only a one-week publication lag.

New composite index method – an improved method of composite index construction is used (Geoffrey Moore and Julius Shiskin developed the original LEI method). The result is a more clearly cyclical index with increased sensitivity at economic cycle turning points.

Revisions – only one component (money supply) out of seven is subject to significant revision.  Again, I don’t revise this in my view – and I’ve studied money flows, which may not be the same thing as money supply, but it’s not worthy of a revision.

Leads – the WLI has an average lead of 10 months at business cycle peaks and three months at business cycle troughs, which amounts to a longer overall lead than the LEI. Given its prompt availability, the WLI has an even longer effective lead at business cycle turning points, and would have historically signaled a typical recession about three months ahead of the LEI. In fact, the WLI has a longer effective lead than the LEI at 83% of business cycle peaks and 60% of business cycle troughs.

Conclusion?  You are better off looking at a chart of the stock market as a leading indicator of the economy, then paying attention to this indicator.  The stock market is the BEST indicator of future economic activity.  While the ECRI can take into account several data sets – the stock market takes into account ANY AND ALL influences that may be influencing the economy and weights them accordingly.