The week had a negative cast to it, ending on a sour note with the ECRI WLI and WLI growth index both down. Things headed down by Tuesday with the PPI taking a large fall. The PPI being down was not so much about inflation as aggregate demand. An economy is not growing at this point in a recession if producer prices drop .6% across both intermediate and finished goods.
Housing starts was another big disappointment down almost 11%. What effect if any on this poor performance resulted from uncertainty about the new home buyers credit program remains to be seen. Jobless claims was the big news of the week for bulls with a second straight week of new claims at the 500,000 level confirming the prior weeks decline. While the Philly Fed was a positive all it did was pair off with and eliminate the earlier negative report from the Empire State Index. I think it’s fair to say that as the week ended forces in the economy are now pretty well balanced between recovery and decline.
The biggest news of the week was another down week for ECRI, the not very widely disseminated index with significant influence on Wall Street. Clearly this put the whole week in the negative column for the economy. Because ECRI is a private concern, only ECRI can say what the parameters and protocols are to make a call on the economy. This week it became clear to all that it requires at the very least a change in the 4 week moving average. Fair enough. We can’t be that far away.
As I have stated previously, ECRI uses a global commodity index as one of its leading indicators. See earlier post. Relying on the commodities index is an important flaw in their model. Many people recognize that commodities are driven by China, not the US, and there is no path to use to postulate that somehow what happens in China with commodities will influence the US economy. Without that index in their model, their 4 week moving average would already be heading downward. We would already have a sell signal for the stock market.
ECRI is so important because so many rely on its excellent record in the past to formulate their opinions on the future direction of the economy and thus the stock market. For many ECRI was the one critical deciding factor in deciding their market view, going back as early as March. The fact its call is delayed now is good for those in the market who recognize that, as it allows them to take advantage of a situation that everyone will know about in the very near future. Although ECRI may feel constrained as economists to call a turn in the economy and rightly so, when making a call on the market it is much better to make it when your downside is at least partially protected by being early.