Leading economic indicators

Divining the future

The case for keeping a close eye on leading economic indicators

Is this a good time for your company to expand? Or for you to splash out on that new car? The answer may well depend on the likelihood of a sharp economic downturn in the next year or two. Economic forecasts say the risk is slight: in the Economists’s most recent monthly poll, the average prediction of America’s GDP growth this year was a robust 3.5% - less than in 2003, but above the long-term trend. However, other guides to the future, known as leading economic indicators, tell a different story. Several of these suggest that the slowdown in many economies in the second half of last year was not just a “soft patch”, but may prove more prolonged.

Should you trust the leading indicators or the forecasts? Embarrassingly, conventional economic forecasts have rarely correctly predicted a recession. In late 1981, when (it later transpired) America’s economy was already shrinking, the average forecast for GDP growth in 1982 was over 2%. In the event, output fell by 2%. In August 1990, the very month that America dipped into its next recession, the consensus was that the economy would grow by 2% in 1991; again output declined. In early 2001, the average forecast for growth that year was also close to 2%. We now know that a recession was already under way.

Some economists argue that recessions are typically caused by unpredictable shocks, such as the events of September 11^th 2001 or a sudden rise in oil prices. But that excuse will not do, at least for 2001: official figures show that the recession started months before the September attacks. The trouble is not the unpredictability of events, but that the economic models on which forecasts are based are not up to the job. Despite containing hundreds of equations, models are notoriously bad at predicting recessions because they tend to extrapolate the past, for most of which the economy has been expanding. Yet recessions stem from abrupt changes in the behaviour of firms and consumers.

Scrutinising indicators that have given advance warning of downturns in the past, such as share prices, order books or the shape of the yield curve, seems more helpful than relying on models. There is no single magic measure; each leading indicator has failed to predict a turning point at one time or another. But leading indicators are unlikely all to give false signals at the same time, so a composite index that combines several economic and financial measures stands a good chance of spotting changes in the economic weather.

The Economist, 2005

Notes

1. to splash out –транжирить, сорить деньгами

1. may well depend on.. –“well” выражает эмфазу (усиление) и переводится как «вполне возможно”, “не исключено,что”

2. “soft patch” –временное явление (“to soften” означает ухудшение положения)

3. in the event –здесь:фактически

4. composite index –составной индекс

5. economic weather =economic situation (сравните: economic terrain)

Vocabulary

robust growth –быстрый рост

long-term trend – долгосрочная тенденция

shrinking economy – замедление темпов экономического роста

to be under way – начаться( о процессе), происходить

to argue – утверждать

a rise in prices – рост цен (обратить внимание на предлог “in”)

to be up to the job –годиться, подходить для чего-либо

to extrapolate the past – опираться на опыт прошлого (в анализе)

order book – объем заказов (на предприятии)

yield curve – кривая доходов

a composite index – составной индекс

Exercises

1. Pronounce the following:

guide, embarrassingly, unpredictability, extrapolate, scrutinizing, yield

1. Find in the text the equivalents to the following:

индекс опережающих показателей; резкое снижение темпов экономического роста; активный рост экономики, замедление темпов экономического роста; прогноз (2); спад (в экономике); сокращаться (о темпах роста); средний показатель прогноза; объем производства

1. Form derivative from the following:

to expand, likely, economy, to forecast, to predict, to guide, long, to embarrass, to tend, to measure, finance

1. Find in the text phrases to match the following:

вероятность резкого экономического спада; риск невелик; иные ориетниры на будущее говорят о другом; могут оказаться более продолжительными; в конце 1981 года; как раз в том месяце, когда в США начался следующий спад; в начале 2001 года; спад уже начался; экономисты аргументируют (свои заявления) тем, что; эти экономические модели не годятся; эти модели снискали дурную славу, экономика растет быстрыми темпами, причиной спадов являются…; нет какого-то единого магического способа оценки; объединить несколько экономических и финансовых показателей; (они) вполне могут уловить изменения в экономическом климате.

Who Will Win the Prize?

The world’s best performing economies change because each decade’s problems are different.

By Richard B.Freeman

Too bad the Academy of Dismal Science doesn’t hand out Oscars for economic excellence. Throughout the ‘90s, the United States would have won, hands down. As in the movie business, however, it’s tough to repeat in the economic world. In the 1980s the winner was Japan, with lifetime employment and pay by seniority. In the 1970s, it was Gremany: apprenticeship programs, workers on boards of directors, powerful unions and an extensive social-welfare system.

Today, it’s anyone’s guess. U.S. unemployment remains low, but the economy looks weaker than it has been in decades. Employment growth remains anemic. Highly educated workers watch as major firms move good jobs to India and China. The dollar has fallen and the trade deficit has risen to new hights. The fiscal deficit is projected to go on and on. If the United States were a developing country, the IMF would be prescribing hard medicine: cut the deficit (really), run a recessin to reduce imports and produce more and cheaper exports, sell more companies and assets to China, Japan, Europe.

Many business leaders are betting on China as this decade’s star. Growth has been exceptional, giving it the best-developing-country award for the 1990s. Starting as one of the poorest countries in the world (people were starving under Mao), China has modernised with extraordinary speed, investing massively in human as well as physical capital. And making rapid progress in high-tech sectors the United States has historically dominated. But China has its own weaknesses: huge urban/rural economic disparities that could produce social disorder, corruption and a weak legal system, a poorly functioning banking system, pollution, inadequate health care and the absence of democratic processes. Developing countries that do well in one decade more often than not fail in the next. Just a few years ago Indonesia was heralded as a great economic success. Argentina was a poster economy of the IMF and World Bank.

Why is it so hard to predict which economy will lead in the future? One reason is that economic problems change. In the 1970s, the challenge was the inflationary shock of oil prices and balance-of-payments problems, which gave an edge to countries that could coordinate wage and price settlements. In the 1990s, the problem was adjusting to high unemployment and new technologies, which favoured countries with high labor mobility and ease of forming companies. Currently, the need is to adjust to the rise of China and India, with their huge populations and low wages. Politics and institutions that work best in addressing one problem don’t always work for another.

It’s natural to search for differences between the decade’s best performer and the rest of the pack. But in the end, luck seems as key as economic policies. All major economies today are based on market capitalism. The same multinationals operate around the world. Working in Europe is different from working in the United States – but not that different. Inevitably, some economies will do better than others, just as some movies do better at the box office, for reasons producers, performers and investors couldn’t foresee. Heretical though it may sound, economists and other members of the Academy of Dismal Science probably don’t know half as much as we think we do about what produces stellar economic performance.

Newsweek