Monday, July 6, 2009

ECRI: Two strikes

I don't have too much respect for the field of economics. There are many brilliant economists but, as a whole, I think that they rely too much on modelling and theory.

There are a few great ones (David Rosenberg, for example). Others that I sometimes disagree with (Paul McCulley and Paul Krugman) must be read as they are brilliant thinkers. Even Alan Greenspan and Ben Bernanke are intelligent, although they have made many grave errors.

Until late 2007/early 2008, I had thought that ECRI (Economic Cycle Research Institute) was a star and I assumed that whenever the recession hit, they would be leading the call.


I believe that they are one of the few (or only?) major organization that correctly called the 1991 and 2001 recessions, without any false alarms. In addition, ECRI had a legend, Geoffrey H. Moore, as its founder. Click here for more details on Moore and ECRI.

In September 2000, ECRI warned of a possible recession while most (including yours truly, sadly) thought that the tech boom would last another decade. In March 2001, ECRI called a recession at some point in 2001 inevitable. Later it was determined by NBER (National Bureau of Economic Research) that a recession started that month (March 2001). Never mind that they gave no definitive advance warning of that recession (they stated some point in 2001 when in fact, the recession started that month). At least they were on the right side of the fence.

The 2001 call was borderline, in that it did not advance notice as they are supposed to predict cyclical turns. The current recession was determined to have begun in December 2007 by NBER. In December 2007 (from ECRI's site):

"With Weekly Leading Index growth not far from its lowest reading since the 2001 recession, U.S. growth prospects have clearly darkened, but a recession is still not inevitable," said Lakshman Achuthan, managing director at ECRI.

OK, fine, let's assume that ECRI did not agree with NBER that the recession started in December 2007.

In late March 2008, they gave the official call:

The U.S. economy is now on a recession track. Yet this is a recession that could have been averted.

I think it is clear, as it was then, was that this was not a recession that could have been averted. No amount of stimulus in late 2007 would have saved Lehman, Bear Stearns, AIG, nor would it have saved the US consumer , nor would it have prevented the US housing bubble from blowing up. No amount of stimulus would have saved the commodity bubble, nor would it have saved the record high profit margins of US corporations. This "averted" is simply a way of deflecting blame on a missed call.

A little late in my opinion, for an organization that is supposed to predict recessions, not call them in real-time time, or after the fact.

This is Strike #1 (i.e. no real advance warning again and quite possibly late by 4 months if you believe NBER, as I do). In fairness to ECRI, their leading indexes did deteriorate by December 2007, but perhaps not early enough or far enough to issue a call. Their leading indexes also did deteriorate in the fall of 2008 to multi-decade lows.

Strike #2:
The Economic Cycle Research Institute's Leading Home Price Index is "pointing to a bottom in home prices" and signaling a recovery in demand, said Lakshman Achuthan, ECRI's managing director.
This was written on May 2007 (on the ECRI site). Oops. Housing prices only really began to plummet after this call.

Strike 3?

Now, ECRI is saying the following (and to their credit, said this back in late April, before the consensus embraced this view):
"We'll definitely see the end of this recession this summer," ECRI managing director Lakshman Achuthan said Wednesday. "As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts."

Achuthan acknowledged that difficulties such as unemployment and excess debt will take a long time to overcome, and that confidence is weak. That's to be expected.

"The general mood is probably overly pessimistic. That's quite normal in the wake of a crisis. There is almost always a giant error of pessimism," he said.
I suspect that their models work better with garden variety recessions, not credit and housing bubble induced depressions. If they blow this call, I think that this will be strike #3 in my book. I suspect we will learn the truth in the next few months, and if I am wrong, I will issue a full apology to ECRI for my criticism on this blog.

While I think ECRI is wrong, I will admit that they are the only thing going for the bull camp in my book.

Update July 9/09: I have made a few small changes to my posting, mostly to clarify a few points (as pointed out by an astute reader: ECRI was definitely not blind to the onset of the current recession). Their leading indexes did do a fairly good job, but either they did not sink far or early enough or the interpretation by Mr. Lakshman Acuthan was not accurate. Mr. Acuthan appears to be a very decent and very intelligent person, and this is not meant as a personal slight. It is simply based on the facts as I see them. I will send the link to this post to ECRI and see if they wish to comment.


BBC said...

They are OUT - I don't need to wait to see about #3 (but it ain't looking good)!

Thanks for the links...interesting.

Anonymous said...

Be careful that you don't limit your reading of what ECRI says to that which supports your current (bearish?) view.

ECRI was not blind to the onset of the current recession. To the contrary their leading indexes turned down mid 2007 (after correctly predicting the 5yr high in growth in the middle of that year). I know this because I used to work for a place that received their professional reports.

Anyhow, there are places you can look for evidence of all this. Kirk (a blogger) keeps a good record of ECRI's view coming into this recession:

Adil Burney said...

thanks for the comments.
anonymous: I agree with what you said and ECRI was definitely not blind to the onset of the current recession, and I hope that my post did not give that impression. Their leading indexes did do a fairly good job, but either they did not sink far enough or the interpretation by Lakshman Acuthan was not accurate.

Let's see what happens here, but an error here will be strike 3.

In fact, I am familiar with Kirk's and I stopped reading him because he was wrongly bullish in the earlier stages of the bear(if memory serves me).

Anonymous said...

seems like they didn't strike out. what do you say now?

Anonymous said...

they are making another recession call. what happened to strike #3. also do they get credit for calling the soft patch summer of 2010 instead of double dip? what is the view? was there an apology ever written? would you write one if they are right again?

Adil Burney said...

Hi Anonymous

I have a new post out. Lemme know what you think, and please sign it (do you know/work with ECRI?)