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.



U.S. Recession as Rebate Checks Too Tardy

An increasing number of economists and politicians have been debating whether the U.S. is in a recession or not. One of the leading forecasting groups, however, says the recession is most definitely coming.

The Economic Cycle Research Institute, a New York-based measurer of the economy—widely considered one of the authorities in identifying economic trends—said yesterday its data indicate that the U.S. economy is “finally set on a recessionary course.” The firm’s weekly leading index fell to 130.8 in the week of March 14 from 132.1 in the previous week, revised down from 132.2.

“The leading indicators have been veering toward a recessionary path for some time, but up to now, in principle, the jury was still out,” Lakshman Achuthan, managing director at ECRI, wrote in a report yesterday. “Now the verdict is finally in. We have unambiguously turned onto the recession track.”

Mr. Achuthan said the index’s most recent drop comes as many of its growth indicators continue to spiral downward, including slumping share prices, higher jobless claims and weaker housing. It’s too early to call, however, how bad this recession will be, he said.

“No doubt, the stimulus [package unveiled by President Bush in January] will boost growth temporarily, especially because business inventories remain low,” he said. “But with ECRI’s leading indexes in cyclical downswings, it is too soon to tell how deep the recession will turn out to be. Still, we may not see the two successive quarterly declines in GDP that are popularly associated with a recession.”

Mr. Achuthan argued that this recession could have been averted had Congress considered “innovative ways” to get tax rebates into consumers’ hands sooner. (The rebates still have not begun to reach taxpayers). “Following a presidential initiative, Congress passed a tax rebate package with unusual speed, as officials noted that time was of the essence,” he wrote, “but they were content to let the rebates start reaching consumers several months later.”

He added: “For the purpose of averting a recession, several months is a lifetime, so the stimulus is likely to arrive too late to avert a recession.”

Not all agree with Mr. Achuthan’s views. William Knapp, investment strategist for MainStay Investments, wrote in a report yesterday that the Fed’s 75-basis-point rate cut earlier this week “mollified, but did not tranquilize” wary investors. But he noted that the Fed’s moves have led to a decline in mortgage rates that may produce a pickup in housing sales and should encourage refinancing.

“The labor market is clearly showing signs of weakening, but not necessarily distress just yet,” Mr. Knapp wrote. “The harmonizing of lower mortgage rates, lower food and energy prices and the coming tax rebates should reverse the downtrend in labor and the broader economy.”