Is the Economy Slowing Down?

The Economic Cycle Research Institute (ECRI) was founded by Geoffrey Moore in 1996 to conduct research and publish economic indicators for the US and other countries.  Moore was instrumental in creating the Leading Economic Indicators (LEI) for the US government in the 1950’s and 1960’s.  The government publishes its LEI information once a month, while the ECRI publishes its Weekly Leading Index (WLI) every week.  You can go to the ECRI website (businesscycle.com) and download the WLI statistics going back to January 1967.

Why is the WLI important?
The WLI provides a glimpse into the health of the US economy.  Below is a chart of the WLI from 1991 to 2003.  The WLI is very accurate at predicting turning points in the economy.  It is easier to see a change in the economy by charting the year to year change in the WLI.  

While changes in the WLI do not track movement in the stock market very well, when the annual change in WLI is negative and the stock market (symbolized by the S&P 500) goes below a long-term moving average, large market downturns are more likely.  In fact, each of the downturns over 40% in the past 44 years (1973-1974, 2000-2002, 2008-2009) were preceded by this condition.

Basically, when the fundamentals of the economy are declining (as represented by the annual change in the WLI dropping below zero) and the stock market breaks key support (as represented by the S&P 500 falling below a long-term moving average) a warning has been given.  Investors should heed that warning by closely monitoring their equity holdings and taking protective measures.   Below are charts of the 2000 to 2002 downturn and the 2008 to 2009 downturn.    

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Where are we now?
The annual change in the WLI dropped below the zero line in mid-December.  It was signaling a slowdown in the economy, but most economists were telling us that the expansion was getting stronger.  The consensus view of the 4th quarter GDP was for a reading of 3.3% growth.  Instead, the GDP number was only 2.6%.  So far the S&P 500 is holding above its moving average, so a major downturn is not imminent.