The Strongest Signal of an Upturn

Using a new statistical telescope, Government economists peered into the future of the economy last week and found the strongest evidence yet that the long-awaited recovery should begin soon, perhaps even this month. They published for the first time a drastically revised index of twelve leading indicators--measures of economic activity that tend to turn up or down ahead of the general economy--calculated back to 1948. Result: after dropping for eleven straight months, the index rose 1% in March and 4.2% in April; the April increase was the largest on record. Looking back over their calculations, the statisticians found that in the past the new index usually has turned up two months before the start of a general rebound. If that relationship holds true again, May will prove to be the bottom month of the recession and June the first month of recovery.

Other optimistic predictions came at week's end from Council of Economic Advisers Chairman Alan Greenspan and Budget Boss James Lynn, who presented an Administration updating of the forecasts that President Ford made when he unveiled his budget in February. Once again they conceded that the recession has been worse than they anticipated; for instance, they now expect unemployment to average 8.7% this year, v. an 8.1% average projected earlier (Greenspan said the rate is likely to rise for May and that it will top 9% before it gets better). But they also predicted a stronger recovery after midyear than their February estimates had envisioned. Greenspan implied that real gross national product--total production minus price increases--will rise more than 5% in the third quarter and more than 7% in the fourth. For 1976 the Administration once expected only 4.8% real growth; now it is forecasting 6.3%. The original budget forecast had assumed that consumer prices in 1975 would average 11.3% higher than in 1974; the new prediction is 9.1%.

Higher Deficit. As for the budget itself, the Administration now projects a $59.9 billion deficit for fiscal 1976, which starts in July, v. a $51 billion forecast earlier. That almost certainly reflects President Ford's policy proposals and insistence that a $60 billion deficit is the biggest the nation can stand. To safeguard his objective, Ford can derail some congressional spending plans. Last week he vetoed a $5.9 billion supplemental appropriations bill because it provided more money for summer jobs, greater unemployment compensation and other programs than he had requested; Democrats are uncertain that they can override the veto. Nonetheless, Congress is sure to raise spending enough to push the actual fiscal 1976 deficit to $70 billion or more. The Administration's opposition to a higher deficit was articulated by Greenspan, who told reporters: "As we go over a $60 billion deficit, we very clearly increase the risk of reigniting inflationary forces."

It was inflation, in fact, that originally necessitated the creation of the new index of leading indicators. The old index proved trustworthy from its inception in 1948 until about 1970, but from then on it was badly distorted by accelerating price increases; they pushed some components of the old index, like new orders for durable goods, higher than the actual level of business activity would have warranted. For the past 2 1/2 years, Commerce Department statisticians have been overhauling the index, calculating some components in terms of constant 1967 dollars to remove the effects of inflation, throwing out some old measures and substituting new ones that they consider more sensitive to coming business fluctuations. Among them: new orders for consumer goods and materials, and money supply. They feel that they now have a much more reliable measure. One bit of evidence: had it been available in time, the new index would have begun foretelling the recession three months before it began in November, 1973, and it would have confirmed the downturn convincingly throughout 1974. Although the old index began dropping two months before the recession, it misleadingly turned up again for seven months in 1974.

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