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October 2019
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Doyne Farmer interview: macroecnomics from bottom up

Agent-based modeling of housing market and macroeconomy, explained by Doyne Farmer:

Business cycle indicator says double-dip is likely

ECRI WLI index says there is a fair chance that double-dip is coming.  Here is an analysis I borrowed from dshort.com.

(click to enlarge; graph courtesy of dshort.com)

According to dshort:

A significant decline in the WLI has been a leading indicator for six of the seven recessions since the 1960s. It lagged one recession (1981-1982) by nine weeks. The WLI did turned negative 17 times when no recession followed, but 14 of those declines were only slightly negative (-0.1 to -2.4) and most of them reversed after relatively brief periods.

Three of the false negatives were deeper declines. The Crash of 1987 took the Index negative for 68 weeks with a trough of -6.8. The Financial Crisis of 1998, which included the collapse of Long Term Capital Management, took the Index negative for 23 weeks with a trough of -4.5.  The third significant false negative came near the bottom of the bear market of 2000-2002, about nine months after the brief recession of 2001. At the time, the WLI seemed to be signaling a double-dip recession, but the economy and market accelerated in tandem in the spring of 2003, and a recession was avoided.

The question, of course, is whether the latest WLI decline is a leading indicator of a recession or a false negative. The index has never dropped to the current level without the onset of a recession. The deepest decline without a near-term recession was in the Crash of 1987, when the index slipped to -6.8.