Forecast: economy to rebound in the next 12 months

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Ignore the Dow, turn away from those awful unemployment figures, and ask yourself:

Are we headed down for the next 12 months – or up?

Up, says one forecasting firm, which has been looking at 90 years' worth of business cycles. Three strong indicators have combined to create a "growth rate cycle upturn," according to Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York, which signals a coming rebound.

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A rare confluence

First, ECRI's long leading index bottomed out in November. Then, its weekly leading index hit its low in December and now stands at a 23-week high. Finally, the stock market rose roughly 20 percent from its lows in March.

That's not too dramatic on the face of it. All that the indicators are measuring so far is that the economy is contracting at a slower pace than before.

Here's the exciting point: In 16 of the past 17 recessions, a growth rate cycle upturn has been followed by an upturn in the business cycle. That means that over the past 90 years, the confluence of indicators has correctly forecast an economic recovery all but once.

"The possibility of a sharper recovery is higher than people think," said Mr. Achuthan in an interview.

Fighting pessimism

Of course, no one believes him. Not the clients he talked to on Monday. Even he himself is surprised.

"When you back away from the statistics and look outside, you see the effects of the worst recession since World War II. The world economy is facing its biggest challenge," he said. But in such tough times there's an "error in perceptions. It's an error of pessimism where you don't believe it can ever change."

So what was the one exception?

It was 1931. The indicators pointed to an upturn that, instead, turned into the disastrous slide of 1932, which turned the Depression into a Great Depression.

In fairness, ECRI's long leading index turned negative at the beginning of 1932, more than two months before the Dow Jones Industrial Average began its decline.

"I cannot rule that [second decline] out," Achuthan said. But the long leading index would have to turn negative first, he added. The indicators "have kept us in very good stead."

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