Double Dip?

Powerful Predictor of Recessions

One leading indicator that is tracked by some experts, and that I personally have been following, is the ECRI Weekly Leading Index.

This index has been surprisingly powerful at predicting recessions over the past 40 years.  Importantly, economist David Rosenberg first pointed out that WLI Growth of negative ten has always indicated a recession occurring or soon to occur (chart below - shaded regions indicate official recessionary periods).

As you can see by this second chart, ECRI WLI growth has declined dramatically to -5.7%.  Historically, there has been only one reading at/below -5.7% that did not correspond to a recession.

Based upon this data, it seems more likely than not that the economy will fall back into recession (barring government intervention).

But Wait (before you sell your stocks or jump out the window)...

There are several drawbacks to this conclusion:

1. The recent run-up for WLI growth has been the strongest in recorded history.  It's possible that the dramatic whiplash back into negative territory is a function of the elasticity of the index (after a strong rise, maybe a strong drop is normal)... and not necessarily ill-boding for the economy
2. One study has been done that suggests the ECRI WLI may actually be a lagging indicator of stock performance
3. The strong correlation b/w the index and stock performance (suggested in study above) may be due to the fact that stock performance is a component of the index.

Together, these caveats should give considerable pause to the recommendation of preparing for an imminent double-dip for the U.S.

My Opinion (for what it's worth)...

It's hard to say for certain: the evidence is certainly convincing, but a good analyst knows the limitations of the data used.  Based upon what I know, I would say the probability of a double-dip recession is approximately 60% (again, barring government intervention such as quantitative easing - aka money debasing).  Keep in mind, I would classify myself as a pessimist.