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Flashback to 2009: ECRI’s Contrarian Recovery Forecast
ECRI | Apr 18, 2019

At the London G20 conference in April 2009, concerted action to head off a depression was at the top of the agenda. The consensus outlook was bleak, to say the least.

Bucking the consensus, ECRI had called a U.S. growth rate cycle upturn the previous month, in March. Notably, our research had shown that "every (postwar) growth rate cycle upturn that began in a recession ha[d] been followed by a business cycle upturn." Thus, we were monitoring our leading indexes for confirmation.

In April 2009, we received that confirmation and predicted that the U.S. recession would end “by summer.” Below are excerpts from that report.

Please contact us for a full copy of our April 2009 U.S. Cyclical Outlook report.

On the upturns in our leading indexes:

Growth in the U.S. Long Leading Index (USLLI) turned up in November, followed in early December by a cyclical upturn in WLI growth. What does this tell us about the likely timing of the U.S. growth rate cycle upturn? As we discuss later, the historical leads of USLLI growth and WLI growth prior to U.S. growth rate cycle upturns that began during recessions are quite informative. In fact, in the case of USLLI growth, we can examine the leads and lags all the way back to 1920, thus covering not only the postwar era but also the prewar period when depressions and crises were far more common. The preponderance of the evidence, based on those historical lead times, suggests that the growth rate cycle upturn will begin this spring or by early summer, at the latest.

On implications for equity markets:

This has major implications for the likely course of stock prices, because there is a virtual one-to-one correspondence between stock price cycles and growth rate cycles in the U.S. economy. Since a growth rate cycle upturn is at hand, stock prices are likely to experience a cyclical upswing, which may have already begun in early March. Given the imminence of the growth rate cycle upturn, the cyclical low for stock prices was probably reached in March; if not, its cyclical low is unlikely to be many months away.

How we knew it wasn’t different this time:

There are some who contend, however, that the current contraction is not like postwar recessions – in fact, some believe that the best analogy may be to the recession associated with the panic of 1907. Therefore, in order to reach back more than a century to that depression, we decided to share with our members for the first time the Index of Original Leading Indicators (IOLI), which we have never before shown to anyone outside ECRI.

The IOLI, which is comprised of the original list of leading indicators of recession and recovery, not only has an unrivaled 105-year history, but has been proven to work under an unmatched variety of structural conditions at different times in history and in different countries.

We were also making a home price upturn call:

A central element of the current recession is the home price downturn, starting in late 2005, that was anticipated by the U.S. Leading Home Price Index (USLHPI). What we find is that USLHPI growth has lately begun to firm.

If this upturn continues, the pace of decline in home prices is likely to stabilize in the months ahead. If that happens, it could potentially trigger a sea change in market sentiment about the housing-related securities that are central to the current credit crisis. The potential implications are obviously enormous.

The giant error of pessimism:

The long history of business cycles is peppered with periods of excessive optimism and pessimism. The persistence of prosperity tends to inflame the animal spirits, giving rise to what Wesley C. Mitchell, who mentored ECRI’s late founder, Geoffrey H. Moore, called the "error of optimism." As Mitchell wrote in 1927, "the optimistic error once born grows in scope and magnitude.... But since the prosperity has been built largely upon error, a day of reckoning must come… Then the past miscalculation becomes patent – patent to creditors as well as to debtors, and the creditors apply pressure for repayment. Thus prosperity ends in a crisis."

Once the cycle turns down, unquestioning faith is broken and pessimism runs rampant. Or, as Mitchell quotes A. C. Pigou writing in 1920, "The error of optimism dies in the crisis but in dying it ‘gives birth to an error of pessimism. This new error is born, not an infant, but a giant; for (the) boom has necessarily been a period of strong emotional excitement, and an excited man passes from one form of excitement to another more rapidly than he passes to quiescence.’"

Following the latest crisis, the "giant error of pessimism" is now rampant. This is why today many are skeptical that we have the first clear signs that the recession will end in the coming months.

On our confidence in the recovery forecast:

[O]ur recovery forecast is simply our best reading of an array of objective leading indexes that have stood the test of time better than any others in existence. It is rooted in a rigorous quantitative approach that, unlike most predictions, is not based on hopes or fears, hunches or assumptions, or even data fitting.

We are not long-term bulls or bears, and we do not rule out the danger that the well-established long-term buy and-hold approach to stock market investment will remain a poor strategy in years to come. Yet, it is precisely in such an environment that our cyclical approach is likely to shine. Quite simply, while we are optimistic about the direction of the cycle today, we will change our view when our leading indexes turn down. Until then, we believe a sunnier view of the economic outlook is in order.

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