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The Revenge of the Business Cycle

Business-cycle researchers and Sovietologists suffered the same cruel fate in the 1990s: Their world crumbled. Just as the U.S.S.R. fragmented into so many -stans and -ias, the business cycle was widely written off as a rusted remnant of the industrial past.

But in 2001 the business cycle busted out of its crypt like a zombie, visiting recessions on the U.S., Europe, and Japan. Nowhere was the awakening more rude than in America. Economists James Stock of Harvard and Mark Watson of Princeton have examined the performance of the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters for the period leading up to the recession. "The blue-chip consensus was really not very good," Stock says. That's an understatement. In the fourth quarter of 2000 the 36 forecasters surveyed predicted that the economy would grow at a 3.3% rate in the first quarter of 2001; it shrank by 0.6%. In late 2001 the gang that couldn't predict straight said the economy in the first quarter of 2002 would grow by just 0.1%; it expanded at a whopping 5% pace.

No commission of inquiry has convened to ask why the recession went so widely unpredicted. After all, if genius economists (like Alan Greenspan) and businessmen with their fingers on the economy's pulse (like Cisco CEO John Chambers) couldn't see it coming, then perhaps recessions simply can't be predicted.

Hooey, say Lakshman Achuthan and Anirvan Banerji of the independent Economic Cycle Research Institute (ECRI), co-authors of the slim, highly readable Beating the Business Cycle. They say cycles can be predicted with relative precision. ECRI first warned of the possibility of recession in September 2000, and declared one inevitable in March 2001; it also accurately foresaw the recession in 1990. "To my knowledge, no other group called the last two recessions with no false calls in between," boasts Banerji.

The business of cyclical research is definitely in a cyclical upturn. ECRI's late founder, Geoffrey Moore, developed the U.S. government's leading economic indicators. In recent years the institute has devised methods to pick up signals of turning points for economies such as those of South Korea, Japan, Germany, and Jordan. Next up: China. Since the late 1990s the number of clients paying $50,000 annually for ECRI's reports has risen from 90 to some 130. And the 20,000-copy first printing of Beating the Business Cycle, which says individuals and small businesses can use ECRI's leading indicators to make decisions about, say, buying a house or whether to open a bar, quickly sold out.

Those are impressive numbers for practitioners in a field written off as dead. But then, there have been obits for the business cycle in every generation. In 1929, Yale economist Irving Fisher proclaimed a "permanent plateau of prosperity." In 1969, John Wiley & Sons published Is the Business Cycle Obsolete? (A recession commenced almost immediately.) And in the mid-'90s, a magazine that will remain nameless - okay, it was Business Week - decided it no longer needed to run ECRI's weekly leading index.

The ECRI cyclists chalk up their success to an attribute economists don't often cite: faith. They let themselves be steered by what their guidance system says will happen, not what they think will happen. ECRI refers to its system as the dashboard. In the mystifying climate of the past few years, it has enabled ECRI to make counterintuitive calls. When a global recession hits, for example, experience and common sense dictate that housing prices will fall. But ECRI's leading housing price index showed that U.S. housing prices would continue to rise.

What does the dashboard tell us now? The weekly leading index points to a slowdown in the U.S. "We're going from above-trend growth down closer to trend - about 3%," says Achuthan. Meanwhile, he says, the future inflation gauge projects rising heat: "Both core CPI and CPI are in a cyclical upturn." Oh, and housing prices are still heading upward.

Despite their recent successes, Banerji and Achuthan have been careful not to become smug. After all, once the current expansion gets its legs under it, they know people will stop listening.