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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.

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Ambiguity vs. Downturn


Sometimes an ambiguous economic outlook is better than a clear one if the alternative only offers a negative outcome.

That's the not an insignificant consolation offered by the combination of an improvement both in coincident and in future economic activity, as indicated by two indexes released this week. The signs are hopeful, but still ambiguous regarding the path of the economy.

Just over a week ago, on March 19, the Economic Cycle Research Institute issued a release stating that its leading indicators clearly showed the U.S. economy was entering a "window of vulnerability."

"This means that, depending on the course of oil prices and geopolitical events (the war and the threat of terrorism), the economy can be tipped into a new recession," the ECRI release said.

This dire warning preceded by only a couple of hours the start of the Iraqi war.

To be sure, the ultimate length and even the outcome of the war remain uncertain, but the fact that it has begun has removed one set of uncertainties.

One possible sign of this relief was reflected Friday, when the ECRI released its weekly leading index for the week ended March 21 showing a 2.1% increase.

That left the index just 1.3% below its 52-week moving average, ECRI's preferred analytical measure. The index had been as much as 2.3% below its 52-week average as recently as the prior week.

"The increase was broad-based, said Lakshman Achuthan, managing director of ECRI in New York.

Indeed, ECRI had termed the rise in oil prices "a critical issue (which) has the power to trigger a recession." It's little wonder, then that Achuthan doesn't regard the decline from oil prices as a bad thing.

Achuthan and his colleagues at ECRI remain cautious, however. As pronounced as the increase was in the latest index reading, it is only one week.

More important, the rise may unduly reflect the initial war euphoria that was reflected in the stock market and, just as stocks faltered in the past week, the weekly leading index could give back its gains.

[A]s ECRI's Achuthan said "ambiguity is better that the certainty of a downturn."