When Is A Slide Not A Slump?Gene Koretz
The rule of thumb among U.S. economy-watchers is that a three-month decline in the index of leading indicators is a fairly reliable sign that a recession is apt to materialize within 8 to 12 months. So how should one react to the recent four-month slide in the index, from February through May?
Don't press the panic button, advises Citibank's Economic Week. The bank's gurus point out that the leading index was revamped in 1993, including a statistical adjustment that reduced its upward trend. As a result, consecutive dips are now more common and less likely to foreshadow an outright recession.
Tracing the revamped index's path over the past 25 years, Citibank finds that it would have turned down about a year prior to every recession. But it would also have flashed half a dozen false alarms. And that includes a continuous eight-month decline starting in the spring of 1984, when a half-decade of expansion still lay ahead. So Citibank's economists think it's decidedly premature to conclude that the latest decline signals anything more than a slowdown.