Leading Indicators Fall for 4th Month, Signaling Recession

The government’s chief barometer of future economic activity fell in October for the fourth straight month, the Commerce Department reported Friday, foretelling a recession that most economists believe has already started.

The 1.2% plunge in the index of leading economic indicators came as Federal Reserve Board Chairman Alan Greenspan repeated his assertion that the economy is still not in a recession but he conceded that “it may get there.”

Analysts generally agree that three consecutive dips in the index mean that a recession is on the way, and the October drop followed declines of 0.8% and 1.2% in September and August. In addition, the index for July was revised to a slight decline of 0.1% from the previously reported no change.

Although President Bush and top Administration officials continue to avoid referring to the current slump as anything other than a “slowdown” or a “downturn,” most economists now believe that a recession started last summer.

“The leading indicators seem to be lagging a bit,” said David Wyss, an analyst with DRI/McGraw Hill, a Lexington, Mass., forecasting firm. “It’s telling us recession is coming, when we’ve been in one for three months now.”

“The indicators failed to give us a signal ahead of time but rather at the same time we were falling into recession,” added Bruce Steinberg, an economist with Merrill Lynch in New York. “This index doesn’t tell us anything we don’t know these days.”

One problem with the indicators as a forecasting tool is that virtually all of the 11 components chosen by the Bureau of Economic Analysis are reported individually as they are compiled and are extensively monitored by economic forecasters.

For instance, economists did not need Friday’s report to determine that the average workweek declined in October while unemployment compensation claims rose. Likewise, it was widely known that industrial commodity prices are falling, building permits have plunged, consumer confidence has crumbled, the stock market has fallen and the Federal Reserve has kept money fairly tight and interest rates fairly high. Yet all these are key components of the leading indicators.

Government analysts noted that 8 of the 11 indicators included in the index were negative: consumer confidence, unemployment claims, the workweek, building permits, money supply, stocks, “sensitive materials prices” and vendor deliveries.

Allen R. Sinai, an economist with Boston Co., said he now views the leading indicators as more of a ratification of current trends than a reliable guide to economic performance a quarter or two down the road.

“Four down months in a row in the LEI is pretty definitive (of a recession), along with everything else we know about the economy,” Sinai said.

“This time around, the index is sinking at the same time that the economy is sinking,” Sinai said. “In the old days, this would signal recession through the second quarter next year and perhaps into the third. But because of the changes in the structure of the economy, this report won’t take it out that far.”

So far this year, the index has fallen in six of 10 months--another strong signal that a recession already has arrived. Even President Bush, speaking to reporters Friday, cited the damage inflicted on the economy by the Persian Gulf crisis. “Our economy,” he said, “. . . is at best in a serious slowdown. And if uncertainty remains in the energy markets, the slowdown will get worse.”

Earlier this week, Fed Chairman Alan Greenspan made a similar point, speaking of “a meaningful downturn,” while avoiding use of the word recession.

Speaking to a business audience Thursday in Minneapolis, Greenspan elaborated slightly. “The overall economy is declining,” the Fed chief said. “It has not yet reached a point where it is definable as a recession. It may get there.”