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.



Weekly Leading Index Slips

The U.S economy is increasingly vulnerable to threats like the current spike in oil prices and could, in the worst case scenario, be on the verge of heading back into recession, a report said on Friday.

The Economic Cycle Research Institute said its weekly index fell to a nine-week low due to worries about war and spending.

Anxiety about a possible war in Iraq appears to be fueling not only higher oil prices but also hesitancy among consumers who, until now, had been spending strongly even as they said they were worried.

The ECRI index dipped to 118.9 in the week ended March 7 from 119.0 in the prior week.

ECRI linked the threat of renewed recession to how long any war to rid Iraq of weapons of mass destruction may last.

"This week we see an increasingly fragile economy that is nearing a tipping point," ECRI research director Anirvan Banerji told Reuters. "Depending on the course of oil prices and geopolitical events."

U.S crude oil futures stood at $35.40 a barrel on Friday.

"Even if oil prices went up to $40 right now, that would not be enough to qualify as a negative shock unless the high prices persisted," ECRI Managing Director Lakshman Achuthan said, adding that the current spike has the potential to develop into an economic shock.

Three separate reports this week on consumer sentiment and a fourth on retail sales seemed, for the first time in a long while, to be telling the same story.

Retail sales fell in February by much more than expected, and the three consumer reports, including the University of Michigan's influential monthly sentiment survey, all painted a picture of an increasingly troubled U.S. consumer.

Consumers had helped sustain growth since the 1990's speculative bubble burst some three years ago, despite their expressed concern about the future of the economy.


Consumer confidence could be shored up if the clouds of geopolitical uncertainty hanging over the U.S. economy were dispelled, Achuthan told Reuters.

He said the U.S. consumer, emboldened by the lowest interest rates in nearly four decades, has helped sustain economic growth at a time when corporations have not been investing enough to fuel job market growth.

Mortgage rates have fallen to levels not seen in half a century, encouraging a boom both in housing and in refinancing of mortgages to cash out increased equity value.

But getting the consumer back on track boils down to Iraq and how President Bush and Iraqi President Saddam Hussein resolve their differences, Achuthan said.

"A new recession is not yet baked in the cake ...," Achuthan said, but "if a conflict started and it didn't end in a month or two, any positive impact would dissipate."

Other ECRI global indicators show that the economies of Europe and Asia are similarly vulnerable. A recession in the United States would qualify as an economic shock for them, setting off a synchronized global downturn, Achuthan said.

"In a global recession, the large U.S. trade deficit would become a concern. Since it impacts the currency markets, we would start seeing a lot of volatility in a lot of different places," Achuthan said.