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During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Low Rates Trump Oil, Buoy Economy


Oil prices approaching levels that triggered past recessions are unlikely to cause a downturn this time because interest rates are so low, economists at New York-based Economic Cycle Research Institute said.

"Slowdowns that did not culminate in recessions were characterized by declines in short rates to low levels early on," said ECRI's Lakshman Achuthan and Anirvan Banerji, in a note.

The chart of the day shows one way ECRI economists measure an oil shock. Inflation-adjusted Arab Light crude oil is shown... in current dollars. The present $42.36 price compares with the inflation-adjusted $77.86 peak of Oct. 1981. ECRI uses a 5-year moving average to measure the deviation, or "shock" from the average.

The green arrows, set against a logarithmic vertical axis, show relative movement from the 5-year average, allowing for comparative percentage-change measurement. Note that the present average of $30.44 is above the inflation-adjusted average of 1991 associated with the Persian Gulf War.

Achuthan and Banerji say this shock is "not much smaller than earlier shocks that triggered recessions" and note the recent slowdown in U.S. consumer spending. Still, low rates will likely prevent the economy from tipping into recession, they said.

"International (short-term interest) rates remain low, and are likely to stay that way," even if the Federal Reserve raises rates moderately in the coming months, as promised, they said.

"In that respect, the situation today resembles that in the mid-1990s, when the U.S. economy experienced a soft landing."

Crude oil futures rose to a record today, surpassing $49 a barrel in New York, on concern clashes in southern Iraq between U.S. troops and Shiite Muslim militiamen may cut exports.