Some indicators hint of a lack of balance in US economic recovery
The recession in the US economy officially ended in July 1980, the business cycle dating committee of the National Bureau of Economic Research declared recently. But the economic recovery since then has included some strange developments that are not at all typical of what characteristically happens in the economy after it stops receding. These strange developments may result in the shortest comeback since 1919-1920.Skip to next paragraph
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Prospects for the recovery period ending soon are not to be found in the recent news that real gross national product (GNP in deflated dollars) fell slightly in the second quarter of 1981.
Speedups and slowdowns in quarterly GNP do not tell us what lies ahead. The Second-quarter 1981 GNP slowdown, for example, followed an extremely rapid speedup in the first quarter of 1981. While the first-quarter advance was being reported earlier this year, the economy's upward pace had begun to slow after January on the basis of monthly economic indicators such as industrial production.
But even the Federal Reserve Board's production index is known as a "coincident" indicator. It moves up and down along with the economy, not before the economy or after the economy. Its current movements tell us what is happening in the economy, not what is going to happen.
So-called "leading" indicators can tell us what is going to happen; but their movements are so sensitive that sometimes they are "misleading" rather than "leading."
"Lagging" indicators normally move after the economy as a whole, after the coincident indicators, that is.
The leaders turn downward, then the coincident, then the laggers. But the sequence is a continuing one. First breakfast, then lunch, then dinner. But dinner precedes the next morning's breakfast. Similarly, strength in the laggers precedes weakness in the leaders. Too much strength in certain laggers can bring about difficulties that bring about weakness in the leaders, difficulties that are corrected by a weaker economy.
The current slackening in the economy was first anticipated by the failure of certain laggers to be corrected during the period of receding economic activity in 1980. Commercial and industrial loans and unit labor costs were not seriously curtailed during the first half of 1980.
But more important, there was no lag in these two laggers and in a third lagger, the prime interest rate, after the July 1980 end of the period of receding activity. Unlike 1975, when these three laggers continued downward for some months after a comeback in the economy was under way, these three laggers started upward almost immediately this time.
In the 1975-80 economic recovery, unit labor costs did not exceed their previous peak until roughly a year and a half had passed. Commercial and industrial loans took nearly three years to do so. The prime interest rate did not regain its 1974 high until after more than four years of economic recovery.
This time, the previous peaks in unit labor costs, commercial and industrial loans, and the prime interest rate were exceeded after six months, five months, and one month, respectively, of economic recovery. This performance has been much too rapid.
It is this unusual performance of the laggers that just might put an early end to the economic recovery. If so, it will be a prime example of how the lagging i ndicators can lead to a period of reduced activity.