Trend line of US economy is upbeat. (With this column, the Monitor welcomes Leif H. Olsen, former chairman of economic policy at Citibank, to its pages. Mr. Olsen is a consultant to Citibank and a private economic adviser. His column appears monthly.)
Numbers telling us how the economy is doing have been ambiguous for many months. But, read correctly, economic data over recent months show unmistakable signs of a pickup in activity and employment. Furthermore, the moderate acceleration we have seen so far will continue through the winter.Skip to next paragraph
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Economic numbers fluctuate from month to month. For example, the leading indicators for September were up only 0.1 percent. This was taken as a sign the economy would weaken in the months ahead. But if that is so, what can we say about the relatively strong increases of 0.6 percent in July and 0.9 percent in August?
If the leading indicators tell the truth, then what happened to the good news about the future heralded by those numbers when they came out? The answer is that economists should not place too much emphasis on one month's number.
Averaging results over time provides a clearer picture of what is happening, and what may happen, to the economy. For example, in the three months through June, the leading indicators averaged out to no change; in the three months through September, the index averaged a 0.4 percent increase. Looked at that way, things are clearly getting better.
In one recent issue of the Monitor (Nov. 1), the leading indicators and the September trade balance were said to be troubling signs for the rest of the year. Robert Gough, vice-president of Data Resources, was quoted as saying that Federal Reserve chairman Paul Volcker ``is going to have to allow rates to come down a little bit more to bolster domestic activity.''
And in the same issue, economist Paul A. Samuelson said the United States economy is in good shape, adding that ``The fact that there have been recent signs of strength for the current recovery suggests how hard it would be for the Federal Reserve to force down real interest rates significantly.''
Who is right? I would side with Dr. Samuelson, who takes a longer view of events than one month. He notes the actual pickup in US output in the third quarter. But there are other reasons for agreeing with the professor. Real gross national product measures total output. It excludes changes in prices. It is the most popular measurement of economic performance. It rose 1.9 percent in the three months through June and 3.3 percent through September, according to the latest numbers available.
But monetary and fiscal policies also affect demand in the economy. Monetary policy in particular has been highly expansionary since October 1984. Where is the evidence of this policy? Well, if we look at domestic real demand, we will find it. This demand increased by an average of 3.8 percent in the six months through March of this year. It increased 5.8 percent in the six months through September. Once again, the average results over time reveal that demand is accelerating.
In fact, when Mr. Volcker spoke in Toronto Oct. 31, he peeled away some of the illusive numbers to speak expressly about how well domestic demand has been doing. The words were underscored in his text, signaling the importance he placed on them. He contrasted the relatively strong growth in demand with the weaker increase in output.