ECRI Forecasting Global Economic Slowdown

What lies ahead on our global economic landscape?

Pack lightly because the economic road ahead appears to be increasingly challenging. While government mouthpieces and their media friends are wont to look in the rear view mirror for hints of easier traveling, the wise travelers amongst us always keep our eyes on the road ahead.

Who can help us navigate the upcoming terrain and is forecasting a steep economic slope? I thank one of this blog’s most loyal supporters for introducing the Economic Cycle Research Institute to Sense on Cents.

What exactly makes the ECRI so special?

ECRI is the world’s foremost predictor of recessions and recoveries.

We are students of the business cycle — the most powerful force in market-oriented economies. Over three generations of continuous research covering dozens of economies and hundreds of leading indicators, ECRI researchers have uncovered reliable sequences of events that occur around turning points in economic growth, inflation and employment.

This proprietary system of quantitative analysis distinguishes ECRI from other forecasters. As The Economist noted, “ECRI is perhaps the only organisation to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm.”

ECRI tracks around a dozen leading indices for different parts of the economy. Some of these have a longer lead time relative to economic activity than others, so the firm publishes both a longer leading index, which signals changes in activity about a year in advance, and a shorter leading index, which looks six months ahead. This is one advantage over the Conference Board’s leading economic indicator, which conceals useful information by combining longer- and shorter-term indicators in a single measure.

A second advantage is that ECRI publishes a weekly index and is thus always up to date.

The ECRI clearly has a strong pedigree. More importantly the ECRI is not compromised by an existing relationship with a global investment bank or another entity looking to sell financial products. Against that backdrop, the crowd at the ECRI sees storm clouds on the horizon. Just yesterday IBD released a report covering ECRI’s forecast entitled Cruel Summer?

A global summer slowdown looms as a leading indicator of factory activity has turned down, according to a well-respected independent research firm.

The Economic Cycle Research Institute’s long leading indicator of global industrial growth peaked at 0.7 in August 2010, predicting a cyclical peak for industrial activity this August. The index stood at 0.1 in March, near the lowest level since January 1980.

“There’s a downturn in global industrial growth in clear sight,” said ECRI managing director Lakshman Achuthan.

Output has already started to decelerate in the U.S., Europe and key emerging market countries such as China that have driven the global economic recovery. Yet Achuthan said he sees no sign of a renewed recession.

The long leading global industrial growth index is comprised of about 60 components that Achuthan said represent diverse long-term drivers of global industrial cycles in some 20 countries, including China and India.

“We’ve found that, collectively, they paint a picture showing clear patterns that highlight the earliest antecedents of global industrial cycles,” he said.

Output in the 17-member euro zone unexpectedly fell in March, suggesting that Q1 economic growth may have been weaker than expected.

Production plunged in Japan following the March 11 earthquake and tsunami.

China’s industrial pace has slowed more than expected amid government efforts to cool inflation.

In the U.S., industrial output was flat in April after rising 0.7% in March, as parts shortages due to Japan’s earthquake hurt auto production. Manufacturing production fell 0.5%.

Factories have been a bright spot in a lackluster U.S. recovery, struggling with a still-weak housing market, tight credit and looming government budget cuts.

The Federal Reserve and the National Association for Business Economics have cut their U.S. growth forecasts this year. Achuthan said about half of all slowdowns in overall U.S. economic growth lead to recessions, though he and other economists said that a renewed downturn was unlikely.

Reduced factory activity has had the benefit of bringing down the price of industrial commodities such as oil, copper and lumber. The growth rate of ECRI’s industrial commodity inflation index plunged to a seven-month low of 18.2% in May from 31.2% in April.

“Commodity price inflation is rolling over,” Achuthan said. “This is a classic sequence, and people need to start thinking about the scenario where global industrial growth once again starts to throttle back.”

Crude oil futures rose back above $100 a barrel on Wednesday — up 3% to $100.10 — but well off their recent peak of $114.83. Copper also rallied, but is down about 8% in 2011.

Analysts worry that some central banks may be tightening credit too quickly.

The European Central Bank raised interest rates last month and is widely expected to do so again in July, as inflation runs well above its target despite turmoil in smaller, debt-ridden nations such as Greece, Portugal and Ireland.

The ECB is “too far ahead,” said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics. He added that the central bank responds to oil prices, which have fallen sharply from their peak amid signs of slower economic growth.

Achuthan said the People’s Bank of China has likewise gotten ahead of itself, tightening too sharply even though the economy has started to slow noticeably.

“China is stepping on the brakes, but a slowdown is baked in the cake,” he said. “The risk is they go too far in fighting inflation.”

A day after reporting weaker industrial, retail and lending growth, the central bank ordered banks to set aside more cash for the fifth time this year.

Monetary policy has a long lag. So recent policy moves, designed to battle inflation, won’t affect economic activity until late this year or early 2012.

On the other hand, the U.S. Federal Reserve has kept rates low and maintained loose policies, viewing the recent run-up in commodity prices as temporary, despite the qualms of a few policymakers. The Bank of England has also kept the monetary spigot open as fears about government austerity measures have so far trumped concerns about soaring inflation.

Based on the prognosis of the ECRI, I would ascertain that our ‘walking pneumonia’ will continue to dog us as we navigate the economic landscape.

The ECRI is a perfect complement to the mission of Sense on Cents. As such you can find a link to ECRI in the right hand sidebar here at SoC along with all the other Watchdogs which provide extensive investor education and protection. Once again, I owe a debt of gratitude to the reader who brought the ECRI site to our attention.

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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