Economic Depression Risk: ECRI Leading Index Falls to Great Recession Level

Economic Depression Risk
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Economic Depression Threat Highlighted Again as Leading Economic Index Falls to Great Recession Levels

Leading Economic Indexes are playing a bit of catch up but are also now flagging some economic depression risk.

The latest, the ECRI Weekly Leading Index, designed to foresee economic activity one to two quarters in advance, fell during the Week Ending March 20th to levels last seen during the Great Recession and Great Financial Crisis a decade ago, the last time the U.S. faced a genuine risk of falling into an all-out economic depression.

Leading Economic Indexes are often not as useful at forecasting the economy as one might wish. Many only update monthly, or worse, quarterly.

Even worse still, some have a nasty habit of then making adjustments to their prior “leading” numbers, weeks or months later, sort of entirely defeating the whole concept of leading economic index.

Of the weekly leading economic indicators, ECRI’s is arguably one of the best. In our view, it is among the gold standards of leading economic indexes – especially useful in catching turning points – up or down – in the macro economy.

With this said however, a large caveat arises for something along the lines of a rapidly spreading pandemic, super volcano, meteor strike… you get the idea.

Where their index was pointing three months ago, even two months, one month ago, has had a hard time capturing the realities of such an exogenous shock. Simply put, it couldn’t foresee the unforeseeable.

That said, the index is now playing catch-up, and at an increasingly a quicker pace, and the most recent U.S. report out today, covering leading economic signals in the U.S. for the week ending March 20, is mind numbing and screams economic depression risk.

Now, economic depression is not a phrase that should be tossed around lightly, and we are not. For definitional purposes, we define depression as having three important qualifiers

Economic Depression Definition

  • Especially deep output declines occur in an economic depression
  • Stunningly high unemployment occurs in an economic depression
  • The entire downturn peak to trough lasts for longer than two quarters for one to reasonably call an event an outright economic depression and not merely a ‘panic.’

Thus, contrary to some popular opinion, throughout history, downturns looked upon as an economic depression have not necessarily been years in duration. Most, but not all.

The reason most have is largely because 1. Policy makers made one too many a critical policy mistake responding to whatever crisis precipitated the severe downturn, which tends to lead to 2. Once a hole is dug so deep for a sufficient duration, climbing out of the hole has been made excessively difficult and takes time. In the “Great” economic depression events of the past, this has indeed taken years: 1870s and 1930s come right to mind, and

Donald J. Trump has consistently run to sycophantic media outlets and his Twitter Machine to declare that in his mind there hasn’t been any there, there. That it’s a “Democrat Hoax,” that “There are only five cases and soon to be zero,” that he gets a “ten out of ten” for his response.

The images in his head, that he then feeds his Right Wing Mediasphere and Regurgitron ™ are simply not supported by the data.

ECRI co-founder and Senior Economist Lakshman Achuthan points out that the efficacy of their leading index and of the chances for any meaningful and swift economic recovery at all, hinges on the administration getting its act together, rather than just acting Hollywood-style.

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