My notes as I explore various business and financial topics

Tuesday, March 1, 2011

The ECRI - Watching Your Financial Crystal Ball

Often, while trying to learn more about investing or about business strategy, I come across a technical analysis that goes completely over my head. The trend in ECRI is just one of many. Here is my summary of the ECRI.

Stock prices rise and fall with economic activity. Economic growth translates to bull markets. Bear markets herald a fall to recession. The ECRI provides key insight into the financial direction of the economy. It is so accurate that it has been referred to as the Prophet of the financial markets--a sort of financial crystal ball.

The Economic Cycle Research Institute or ECRI, is an independent economic research orginization that charts the WLI - weekly index of U.S. Leading Economic Indicators.  This chart is commonly refer to as both the WLI and or the ECRI.  Among the many metrics that the ECRI measures are:
  • unemployment rate
  • housing starts
  • Consumer Price Index (a measure for inflation)
  • Consumer Leverage Ratio
  • industrial production
  • bankruptcies
  • Gross Domestic Product
  • retail sales
  • stock market prices
  • money supply changes.
Because the ECRI takes the pulse of the entire spectrum of the U.S. economy, it provides an important tool for forcasting recessions and rebounds. Here is a link at a current ECRI chart, or you can search or more results.

View charts of the ECRI here or here.

How accurate is the ECRI?  It successfully forcasted six out of the last seven recessions since 1960. It has returned some false positives, though.  It took some dips, indicating a double-dip recession at the end of the 2002 bear market, for instance, but a recession never materialized.  Because of this, it should be just one of many tools that you use to gear your business strategy or guide your investment selections in the upcoming year.

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