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Business Cycle Still Alive and Useful

Economic forecasting has had a checkered past, especially when it comes to nailing cyclical turning points - the beginnings and ends of recessions. But one business cycle analysis holds a far better record than other approaches.

Its main practitioners at the Economic Cycle Research Institute call it cyclical data analysis and think it can be adapted into a "customized economic dashboard" to assist not just policy makers and business managers. They believe cyclical analysis can also be adapted to the needs of individual investors and consumers to help them make decisions that affect buying a house or a car, when to invest, even when to ask for a raise or retire.

The system is based on the 80 years of analytical development under economic luminaries and business cycle pioneers such as Wesley Mitchell, Arthur Burns, and their own mentor, Geoffrey Moore.

"We have accurately predicted the last two recessions and recoveries when others have failed," said ECRI economists Lakshman Achuthan and Anirvan Banerji at a gathering Monday evening in New York coinciding with the publication of their new book, "Beating the Business Cycle."

Achuthan and Banerji don't make their assertions lightly. Banerji pointed out that ECRI issued a recession warning in September 2000, six months before the March 2001 date that the National Bureau of Economic Research ultimately settled on as the official peak of the expansion and start of the recession.

"It was even more difficult for us, because Geoffrey Moore had died a year earlier and many critics doubted that we could replicate his ability to call a recession," Banerji said, in reference to Moore's accurate predictive record.

Moore - one of America's leading economic statisticians - had made a recession call in February 1990, five months before the July date that the NBER determined for the peak of the expansion and start of recession.

Leading And Coincident Indicators

In the book, Achuthan and Banerji say the greatest value of cyclical indicator analysis is charting regular relationships between those that lead turns in overall economic activity or those that lead changes in trend for specific indicators.

For instance, Achuthan and Banerji note that economic activity is best measured by a sequence of indicators which, in an expansion, consists of increases in production, leading to increases in employment, leading to increases in income, leading to increases in sales, and repeating.

If these indicators measure output, then other measures that precede the coincident activities can be regarded as leading indicators of that activity...

Moreover, they point out that different combinations of indicators can be combined into composite indicators tailored to the specific business that a firm is in or to specific investment or consumption criteria for individuals.

Achuthan and Banerji make a persuasive case for the superiority of business cycle analysis over other methods for anticipating the cyclical moves that exert such great effect on business and personal economic decisions. More important, they demonstrate how these analyses can be conducted and applied.