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Leaders' Rule Of Thumb

Rules of thumb are easy to use and even easier to misuse.

One of the more venerable rules of thumb for Wall Street economists is that "three straight declines in the index of leading indicators is a sign of a downturn into recession in the next six to nine months."

And yet a report that showed just that Tuesday is not something to be concerned about, economists say. The Conference Board reported Tuesday that its index of leading indicators declined 0.2% in September, marking the fourth monthly decline in a row and seeming to fulfill the criteria of the rule of thumb.

Even the economists who compile the index believe a slavish adoption of the rule of thumb is wrong in this case.

"Four consecutive declines in the leading economic indicators once again raises the question of a double dip," said Ken Goldstein, an economist at the Conference Board who compiles the index. But he added: "A stalling out of growth is a more reasonable prospect than the economy falling back into recession."

Indeed, other economists dismiss the four declines as much ado about very little. One reason is that the stock market, which was especially weak in September, may have had an outsized impact on the index, overstating its role as a predictor of real economic activity...

"I'm impressed that the upturn in industrial metals prices is so much higher than the November low," said Lonski. He pointed out that the Journal of Commerce (ECRI) industrial metals price index was 15.6% up from its low point reached Last November.

The alternative leading indicator, the weekly leading index compiled by the Economic Cycle Research Institute, has followed an irregular pattern lower since hitting a peak in the week ended July 5. In the 15 weeks since the index has registered five increases and 10 decreases, but is 5.7% below that peak level.

Nevertheless, "these are not recessionary readings, just signs of slowing uneven growth," said Anirvan Banerji, research director at ECRI.

Moreover, Banerji points to the fact that other leading indicator series that ECRI compiles argue against a recession.

"We have a (monthly) long leading indicator that has not declined at all: it went up every month through August and was flat in September. Our (monthly) short leading indicator index has fallen, but is not yet recessionary," he said.

The weekly leading index is most useful because of its timeliness.

Banerji also emphasized that "it's very clear that the 2001 recession ended in either December of last year or January of this year. The question, therefore, is not whether the economy will resume the 2001 recession, but rather whether it will begin a new recession after a brief recovery."