The Economic Number Everyone Is Watching (and Getting Wrong)

One financial adviser this month called it ” The Prophet .”  arguing that it “has correctly called every U.S. recession during the last 45 years.” Bond guru Bill Gross recently told the Wall Street Journal that he is “paying particular attention” to it these days. Doug Henwood, editor and publisher of Left Business Observer , notes that it “has issued false alarms in the past” but that if it dips well below zero “the likelihood of another leg of recession would rise to near certainty.” And noted market bear David Rosenberg used it this month to predict a 67 percent chance of a double-dip recession .

What is it? It is the Weekly Leading Index (Excel file), produced by the Economic Cycle Research Institute. The WLI has become so popular lately that the ECRI has taken the unusual step of publicly attempting to refute a ” deluge of misinformation ” about its prized index. When an analyst last month claimed to have “reverse engineered” the WLI and found it to be overly weighted toward housing figures, the ECRI said he was “plain wrong.” Alas, this seems unlikely to completely clear up the mystery, because ECRI won’t reveal exactly what it *does* measure. ECRI seemed more concerned that WLI fans have been jumping to conclusions. Their official verdict for now: The economy is slowing, but a new recession is far from guaranteed.

Such fame can be fleeting. The fact that everyone is looking at the same index means that everyone is focused on the same question, in this case: Are we going to go back into recession? In the fall of 2008, as markets across the world imploded, the hot index was the TED Spread , which measures the difference between the interest rates that banks charge one another on three-month loans, and the interest rate on three-month U.S. Treasury bills. At other points before and during the last recession, would-be prognosticators turned to ” the Vix .” a measurement of volatility derived from options trading. So enjoy your time in the sun, WLI. May a strong recovery force everyone to watch something else.