A Framework That Provides Clarity

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.



Mfg. & Jobs Keeping US Out Of Recession

NEW YORK (MNI) - Resilience in the manufacturing sector and continuing overall employment growth are, so far at least, holding the U.S. economy up and are holding back the Economic Cycle Research Institute from calling for a 2008 recession.

Turning points in economic cycles, which over the past generation have become rare, are the exclusive focus of ECRI, which compiles proprietary composites of existing data.

The key feature of a recession, according to ECRI researcher Lakshman Achuthan in a telephone interview, is a pervasive dispersion of contraction through economic sectors. So far he said the slump in housing has been largely confined to housing.

'There needs to be a wide effect. The only reason we haven't jumped in with two feet given the pressure to forecast a recession is because manufacturing's holding up and employment's not plunging.'

But Achuthan does warn that these offsets to recession are losing strength, a factor that will differentiate the 2007 economy from the 2008 economy. 'Now there's not enough offsets, some of those things that were positive are now negative.'

Nevertheless, Achuthan describes himself as 'agnostic' regarding the risk of recession. 'It's really tough if not impossible to get persistent negative growth unless there's an extended string of negative job and negative manufacturing numbers. Right now we don't see that as imminent. That's why recession isn't baked in the cake yet. Companies aren't so strapped that they have to batten down the hatches today.'

ECRI's flagship indicator for the public, released each Friday at 10:30 a.m. ET, is the Weekly Leading Index. The index is a composite of six economic factors ranging from industrial prices to housing.

The index peaked near 144 in mid-year 2007 before turning south to the mid 130s through the second half. The decline is steep but not quite the magnitude of the 2001 and 1991 recessions. In the 2001 recession, the index fell from a late 1999 peak of about 126 to a late 2001 low of 113.

One of the pluses of ECRI's Weekly Leading Index is that it's rarely revised, only three times since its inception in 1986.

Achuthan said a lack of revision was a central goal of Geoffrey Moore, former commissioner of the Bureau of Labor Statistics, who established a host of economic series including the WLI and what is now the Conference Board's monthly index of leading economic indicators.

'This index is not optimized, it's not revised and fitted. The weights of components are not optimized in retrospect.'

Frequency of the data was another important factor for Moore, who Achuthan said saw the need to make economic data more useful and practical for decision makers in business and government. One of the big advantages of the WLI is that it's weekly and can offer quick reads, and he said perhaps the first read, on whether the economy is firming or slowing.

'Other important factors for an indicator are that it doesn't miss a turn in the economy and it doesn't give you a false signal of a turn in the economy.'...