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In my recent comparison of the Philly Fed's ADS Business Conditions Index (ADS) and the Chicago Fed's Current Activity Index, we saw in the first chart below that the ADS and CFNAI are highly correlated in their read on the economy.
Now let's add the ECRI WLI to the overlay. Since all three indexes are adjusted to zero, the charting process is simple. The next chart shows the raw numbers with one adjustment. I've divided the WLI value by 10, essentially shifting the decimal one place to the left, so that the amplitude of the indicators is on the same scale.
The ADS is a daily index, the WLI is weekly, and the CFNAI is monthly. The next chart adjusts all three to a 3-month moving average. This and makes the chart easier to read by smoothing some of the volatility noise. It does, however, somewhat reduce the extremes of the peaks and troughs for all three. But a comparison with the chart above suggests that this smoothing doesn't change the comparison.
As the callouts in the last chart emphasize, the ECRI Weekly Leading Index is the odd man out. The rebounds after recessions have been faster than the two Federal Reserve indicators. This was especially true following the most recent recession. In fact, the extreme move of the WLI following the Financial Crisis is a conspicuous outlier, not only in comparison to the other two indexes, but also within the context of its own history.
Of course the WLI is a proprietary indicator — a "black box" in comparison to the fairly transparent Fed indicators. Has it lived up to its billing as a "leading" indicator? Perhaps the faster and stronger rebounds after recessions may offer some support for the WLI a leading recovery indicator. But in forecasting downturns, the evidence is less conclusive.
The Chicago Fed offers specific instructions for reading the CFNAI as a recession indicator, with the -0.70 level as a threshold for onset. Interpretation of the ECRI's WLI appears to be a more subjective undertaking. Rather than calling it a black box, this indicator is probably better thought of as a crystal ball that is best left to the ECRI fortune tellers to explain.
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