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What GDP Means To Me

by Lakshman Achuthan
Mar 3, 2009

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Lakshman Achuthan

With job security, purchases and income all tanking in unison, 2008 ended just as badly as we thought it would. This is duly counted up in the latest GDP data, which shows the economy shrinking at a 6.2 percent annualized rate. Still, it can get worse, and abroad, it already has: German GDP dropped at an 8.7 percent rate and Japan's at a 12.7 percent pace in the same period, making this the most pervasive global recession since WWII.

So what do we do with this latest "news" about U.S. GDP? Nothing. Having our memory confirmed doesn't tell us anything about what lies ahead. But the vacuum of confusion that accompanies an economy in free-fall invites a dangerous swarm of ideological spin claiming to have the "solution."

Some argue President Obama's plans aren't big enough to avoid another depression. Others say he's spending far too much and that government should step back and let the economy recover on its own. Many in the middle believe the stimulus will generate a recovery by early 2010, and are already basing their economic, business and household decisions on that.

Naturally, we must make decisions today based on some expectation of what will happen in the future. Yet liberals and conservatives, bulls and bears all have self-serving forecasts of what the economy will look like a year from now, with the attendant policy or investment implications. Necessarily, a few of these forecasts will turn out to be right based on sheer luck, but since year-ahead economic forecasts are no more reliable than month-ahead weather forecasts, what's a decider to do?

One answer is to watch objective economic indicators, especially forward-looking leading indicators whose strength is that they change direction before the economy does. A bonus is that because they're just numbers, they are immune to political debate, and can't hear our sniping back and forth on things like profits, housing, jobs and inventories. A summary of their readings gives you an impartial leading index that cuts through all the "on the one hand, on the other hand" ambiguity, offering a clear verdict on whether a sustainable recovery is in sight. Plus, you don't need to be an expert to see if the index is falling or rising.

The Weekly Leading Index (WLI) is one such promptly available summary measure, designed for the specific purpose of easily monitoring when the economy is apt to shift from recession to recovery and back. Some may worry that this cycle is so radically different from any seen in recent decades that no predictor could possibly work. But the WLI is rooted in business cycle research, dating back to 1870, on leading indicators that have successfully navigated depressions, credit crunches and financial crises.

Business cycles always turn, and there will come a time when the WLI moves sharply higher, offering an objective recovery forecast that can be trusted. In contrast, most economic recovery (or depression) forecasts you hear today are really based on hopes, fears, hunches or assumptions.

To paraphrase Dragnet's Sgt. Joe Friday, "just the facts, ma'am," implying that speculation isn't the best way to figure out what's happening. Good, objective leading indicators are fact-based instruments that turn up only when the economy's key drivers are setting the stage for an actual recovery.

In the meantime, let's resist the temptation to confuse what we hope or fear with what we know.

Lakshman Achuthan is managing director of the Economic Cycle Research Institute. He is a member of Time magazine's board of economists, and co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy.

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