Newspaper article THE JOURNAL RECORD

Recession May Not Be Just around the Corner

Newspaper article THE JOURNAL RECORD

Recession May Not Be Just around the Corner

Article excerpt

Does the decline of the government's index of leading indicators for three months in a row mean a recession is just around the corner?

The short answer is not necessarily. Robert Ortner, the undersecretary of commerce who is the chief overseer of the data, notes that there have been ``enough instances of three months of decline in the leading indicators without a recession following to make it hazardous'' to conclude that the end of the nation's economic expansion is nigh.

The last three times the index dropped three straight months or more without a recession following were in 1984, 1966 and 1962. Nevertheless, the index has called a downturn correctly eight times out of 12 since it was created in 1948 - a batting average of .667. That's enough to give the economic forecasters pause, though most of them are sticking to their earlier predictions that there will be no recession in 1988.

There are three main ways of predicting the business outlook.

- The first is the ``symptomatic,'' or leading indicator, approach, which is now causing slight anxiety. It is the oldest in economics, pioneered in its modern form by the National Bureau of Economic Research. But it has been labeled ``straws in the wind'' by Professor Sidney Alexander of the Massachusetts Institute of Technology.

This approach is based on empirical evidence that a downturn in the business cycle does not come as a bolt from the blue but is spread over a period of time: Certain leading indicators regularly decline before a recession; coincident indicators decline close to the ``reference'' or turning point of the cycle; lagging indicators decline after that turning point is passed. All the indicators rise sequentially before, during and after the turning point of a recovery.

- The second forecasting method is the ``systematic,'' or model-building, approach, based on the idea that the economy is an integrated system that can be represented by mathematical equations. Less rigorously, the systematic approach is employed by economists who track the factors influencing the main components of the gross national product: consumption, investment, government spending and net exports.

Right now, most of these econometricians and most of the judgmental economists as well see a switch from consumption to net exports and business investment - sufficient to keep the economy still growing this year.

A less rigorous variation of the second method of forecasting has been called the ``lost horse'' approach, derived from the joke about how to find a lost horse: ``Ask yourself where you would go if you were a lost horse. …

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