The Economic Cycle Research Institute on September 30, 2011, predicted the economy would fall into a recession, but six months later the economy continued growing, albeit slowly.
ECRI is a distinguished predictor of economic downturns and recoveries whose research is relied on by Fortune 500 companies and institutional investors, but nine months after it made its highly publicized call it appears to be wrong. Still, the Institute has not thrown in the towel on its prediction. To the contrary, it’s doubled up on its bet.
“As students of the business cycle, we admit to being hopelessly biased in our belief that it is simply not possible to repeal recessions in market economies,” ECRI said in a late May 2012 blog post. “It is not whether there will be a recession, but when. And ECRI’s indicators are telling us that a recession is likely to begin by midyear, if not sooner, though this may not become obvious until the end of the year.”
If ECRI was indeed wrong on its call, it’s a big deal for economists because ECRI’s methodology and experience in predicting economic ups and downs are followed so widely. According to The New York Times, “Over the last 15 years, [ECRI] has gotten all of its recession calls right, while issuing no false alarms.”
ECRI was founded in 1996 by Geoffrey H. Moore, who had researched the problems of predicting economic cycles since 1950. In 1958, he developed the Index of Leading Economic Indicators. In 1968, Moore gave the Index to the U.S. Government, which in 1995 selected The Conference Board to produce the U.S. Leading Economic Index (LEI).
In 1979, Moore set up the Center for International Business Cycle Research at Rutgers University, which was relocated to Columbia University in 1983. In 1996, he founded the Economic Cycle Research Institute (ECRI) in New York, where he continued to direct research into business cycles. ECRI embodied Moore’s work until his death in 2000. ECRI, an independent for-profit research provider, endeavors to improve on the LEI. Economist Lakshman Achuthan, a cofounder of ECRI, has carried on Moore’s work.
In a fascinating twist in June 2012, the LEI managed by The Conference Board was not predicting a recession, while ECRI nine months earlier had said a recession was imminent and was sticking to that prediction — even as events argued against a recession coming about.
“In the past 222 years, the U.S. economy has experienced 47 recessions,” ECRI said in a May 2012 blog post. “So, are we to now believe that if the Fed prints enough money, it can postpone the 48th recession indefinitely? Is it plausible that, in an era of deleveraging and very weak income growth, more money printing and borrowing will increase consumption enough to keep the economy out of recession?”
The divergence of ECRI’s predictive index from the LEI has been discussed in detail by economist Fritz Meyer. Meyer asserts that “time’s run out” on ECRI’s September 30 call of recession and will be recorded as “a pretty glaring mistake.”
Moreover, ECRI’s index in early June 2012 took a negative turn for three weeks in a row while its predecessor, the LEI published by The Conference Board, was holding up. Meyer says the LEI historically has dipped well in advance of previous recessions, but such a dip was not seen in the LEI in mid-June.
In fairness to ECRI, not only can it take up to nine months for one of its calls to come about, but it can take another six or nine months for conditions to show up on economic data.
ECRI could turn out ultimately to be correct, but — happily — it’s not looking that way for its last recession call. The episode illustrates the hazards of predicting economic ups and downs, a relatively new science that is likely to take miscalls for another generation or two before it becomes more reliable.