"Street to Sing 'Happy Days Here Again'??"
Feb 17 7:36am ET
By Pierre Belec
NEW YORK (Reuters) - Faster than a speeding bullet, the much-feared recession may just whiz by and things will be looking up again for the world's richest economy. That's the big story from a leading New York research firm.
The nation's growth slowed between the summer and end of 2000, and it has since rebounded nicely, says the Economic Cycle Research Institute.
Time to break out the champagne or the case of beer? Perhaps.
"Based on the tentative signs from four weeks of data and if the economy can keep it up for a month or two, then we may be able to dodge the recession bullet," says Lakshman Achuthan, the institute's managing director.
GREENSPAN'S ECONOMICS TEACHER
The research firm says its Weekly Leading Index (WLI), which was developed by Federal Reserve Chairman Alan Greenspan's former economics teacher, Geoffrey H. Moore, is emitting recovery signals.
Moore, who taught at New York University, was also known as the "Father of the Leading Economic Indicators" (LEI), a monthly gauge that forecasts trends in the economy three to six months in advance. It was developed for the U.S. Commerce Department.
The big advantage of the WLI, which dates back to the late 1980s, is that it gives a snapshot of what's happening now in the economy, instead of what went on a month or so ago.
The WLI is saying the recession slammed the economy and lifted off in the last six months of last year.
"It's a great index for a time like now, when people need a quick read of what is happening to the economy," says Achuthan, "In fact, the WLI forecast the last recession in 1990 in real time."
Indeed, Greenspan, who gets paid to worry about the economy, this week was more upbeat than a month ago, stressing the odds were low that the economy will sink into recession, though he projected a major slowdown.
"In addition to the possibility of a break in confidence, we don't know how far the adjustment of the stocks of consumer durables and business capital equipment has come," the Fed chief told the Senate Banking Committee.
The central bank also made a downward revision in its forecast for this year's growth to between 2 and 2.5 percent from a year earlier. Its previous forecast was for growth of up to 3.75 percent.
The institute's index, which is updated every Friday on the firm's Web site (http://www.businesscycle.com), flagged a peak in the economy in June 2000, as the indicator reached a high of 125.3. The contraction in growth continued into December with the WLI sliding to 119.0. But the good news is that by early January 2001, the index jumped to 122.0 and it has been on a four-week rising streak. By the first week of February, the WLI moved up further to 124.0.
The research firm says the WLI is a step forward in monitoring economic conditions. It takes in the monthly LEI and applies today's instant information technology to give a quick read on such things as American consumers' confidence level.
RECESSIONS NOT ALWAYS WHAT THEY SEEM
Recessions can be tough to figure out. Often, the experts haven't been able to know how deep the economy was in recession until it was in the middle of one.
The WLI, which can signal turning points in business cycles quickly, can spot a recession some three months ahead of the LEI because it is more frequently updated, the institute says.
"At a time like this when we are all trying to figure out where the economy is going -- a soft landing or a recession -- the outcome may be decided right now, which makes it important to have a quick read," Achuthan says.
The components in the WLI perked up right after the Fed's first interest-rate cut on Jan. 3 and consumers reacted with more vigor to the second rate reduction on Jan. 31. The central bank will again be in the center stage of this high drama featuring the world's largest economy when the Fed's policy makers next meet on March 20.
"WLI has a longer effective lead than the LEI at 83 percent of business cycle peaks and 60 percent of business cycle troughs," the firm says.
The stuff that goes into the mix of the Weekly Leading Index: The nation's money supply, and stock and bond mutual funds. The purpose of using stocks and bonds is to get a reading on how rich people feel -- the so-called wealth effect.
Another ingredient is The Journal of Commerce-Economic Cycle Research Institute Materials Price Index, a commodity index that is sensitive to the industrial business cycle.
The WLI also reflects the spread between U.S. Treasury and corporate bonds so that when the spread widens, it suggests uncertainty on Wall Street while a narrowing points to less nail-biting.
Mortgage applications and weekly jobless claims also go into the index's recipe.
Achuthan says the WLI suggests that the economy was at a major crossroads after growth contracted from June to December 2000.
The clinical description of a recession is two or more quarters of declines in the Gross Domestic Product, which measures of the value of all goods and services. The average recession lasts 10-1/2 months. One of the worst lingered for 16 months between 1974-75 because it was a contagion that slammed not only the United States but also the global economy.
The economy lost a lot of altitude all of a sudden last year because business managers ignored the negative vibrations about the economy, figuring that the economic expansion, which was in a record 10th year, would go on and on. The results of their over-optimism were bloated inventories as consumers put on the brakes and companies cut back on spending on new technology.
EXCESSES AND RECESSION
"Recessions are born out of excesses," Achuthan says. "And, there was this absurd sense that under the "New Economy," demand for high tech would continue to increase forever and that there was nothing cyclical about capital investments by companies."
What's happening is that the free market economy is wringing out these excesses through the cyclical process.
But many companies that use technology to run their businesses appear to be doing a great job of reducing their inventories of unsold goods. And, the huge job layoffs that have been announced clearly show that the companies are slowing their production rate to meet the reduced level of consumer demand.
The Commerce Department reported the value of inventories inched up just 0.1 percent to $1.221 trillion in December after a jump of 0.3 percent in November, which was actually revised downward from a previously reported 0.5 percent rise.
The other good news is that any recession has been confined to manufacturing, which is a sector of the economy that accounts for just 20 percent of the U.S. jobs market. The more important services sector, which is still holding up well, generates a whopping 80 percent of the jobs.
The bottom line: The United States is in a healthy position, and the service industry's dominance should provide a healthy cushion against a nasty recession.
So while former NYU student Greenspan says "growth may have stalled," the index created by Moore, his one-time professor who went on to the Economic Cycle Research Institute, shows the economy may be out of the rough.
Stay tuned.
For the week, the Dow Jones industrial average edged up 18.37 points at 10,799.82. The Nasdaq composite index fell 45.50 to 2,425.47 and the Standard & Poor's 500 index was off 13.21 at 1,301.55.
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