Leading Indicators Suggest Worst is Over in the Economy

Posted by: Joe Weber on June 18

arrowuppix.png Economic recovery is growing closer and future growth is not likely to be any slower, just different, a couple fresh bank reports contend. Northern Trust economists point to a sharp rise in the much-watched Index of Leading Economic Indicators to suggest the worst is over. Meanwhile, a top investment strategist at Wells Fargo Bank attacks the notion that the U.S. faces chronically slow growth.

The Conference Board’s Index of Leading Economic Indicators jumped 1.2% in May on top of a revised 1.1% rise the month before, Northern Trust economist Asha G. Bangalore says in the June 18 edition of her Daily Global Commentary. “This is the best back-to-back performance of the index since the November-December 2001 period,” she writes. “The main message from these numbers is that an economic recovery is not too far away.”

The cautious economist is loath to call the turn in the economy just yet. But she points to persuasive data that suggest better performances are imminent. While the index was dragged down by bad news in initial jobless claims, manufacturing workweek time and consumer goods orders in May, it was boosted by positive news about the remaining seven components. Flashing green were building permits, stock prices, interest rate spread, orders of non-defense capital goods, consumer expectations, supplier deliveries and the real money supply.

The index's three-month moving average appears to have hit bottom in March, while the latest three-month moving average has turned upward. The six-month change in the index was positive for the first time in two years, Bangalore reports.

Meanwhile, chief investment strategist James W. Paulsen of the Wells Capital Management unit of Well Fargo Bank took on the notion that the U.S. faces a prolonged period of subpar growth once recovery does take hold. This is the increasingly popular view that, as he says, there will be “no escape and no parole—the U.S. has been sentenced to several years of a slower ‘new-normal’ growth rate.”

Rubbish, Paulsen contends in his Economic and Market Update. While he admits that U.S. households are probably headed for “economic repair” – more savings, less debt and slower spending growth – that doesn’t mean a lost decade of dismal gains. For one thing, stocks, bonds and commodities have been repriced so low, anticipating a chronically reduced growth rate, that they create a “wonderful investment opportunity” for anyone believing in a more normal pattern of gains. This is a “huge new asset in the world.”

Paulsen argues that the economy did not overheat in the 1980s or 1990s as debt use exploded and the savings rate dropped to zero. Average annual real growth in gross domestic product rose about 3.3% between the end of the 1982 recession and the end of 2006, less in fact than the 4% rate it averaged from 1950-80. So he says there’s no reason to expect the economy to “underheat” for a long stretch now that the U.S. consumer has to raise savings and limit debt.

But he does expect the economy to perform differently. Consumer spending, for instance, may wind up chipping in less to GDP growth, while the net export numbers rise. He says the emerging economies, which have grown richer, will be able to buy more from the U.S. to plug the gap in growth for the country.

Getting on a soapbox, Paulsen argues for an end to unfair trade practices by the emerging economies, saying the West needs to hold them to the same fair trade practices it endorses. No more currency manipulation, for instance, and fair labor practices along with an insistence on environmental controls. Such improvements, he argues, would lead to the appreciation of emerging-country currencies and gains in trade.


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BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.

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