Finance and Economic

"U.S. recession is unlikely but not impossible," says the January "Straight Talk," the monthly economic outlook of Gail Fosler, president and chief economist of the Conference Board.

Fosler says the business sector, outside of the financial sector, remains "strong," benefiting as it is from an "export boom." The retreat in housing is "nearly over." "Non-financial corporate profitability looks solid."

In short, "The business sector is fundamentally stronger than at any time since the 1960s," Fosler writes in her latest forecast.

Why is this woman smiling? The Conference Board, a nonprofit business-research group in New York, is entrusted with maintaining the index of leading economic indicators, a gauge designed to predict turning points in the economy. And right now, the leading indicators are flashing signs of a recession.
The Conference Board’s business-cycle gurus use the six-month annualized change in the LEI and the six-month diffusion index to assess the depth, duration and diffusion of the decline in economic activity.

The "Three Ds" rule "helps to refine the signal and better interpret the LEI," said Victor Zarnowitz, senior fellow and economic counselor at the Conference Board.

Zarnowitz’s research has found that recessions generally are characterized by a six-month annualized decline in the LEI of at least 4.5 percent and a sub-50 reading in the six-month diffusion index, indicating that more than half of the 10 components have fallen in the last six months.

In January, the six-month annualized decline in the LEI was 4 percent, the biggest drop since the recession of 2001. The six-month diffusion index stood at 20, the lowest since June 2004. Periods of recession coincide with multiple low readings in the diffusion index.

Fosler was traveling and couldn’t be reached. However, her colleague, economist Ken Goldstein spoke with me instead. He says the U.S guaranteed payday loans. is "on the cusp of recession." The warning so far is "a strong yellow, not a full red."

So why the expectation that the economy will pull back from the edge? "Gail’s view is that if business profits remain OK, businesses have the money to invest and hire," Goldstein said.

But profits aren’t OK. They’re "falling on a year-over-year basis," said Paul Kasriel, chief economist at the Northern Trust Co. in Chicago. "S&P operating profits were down 11 percent in the third quarter from a year earlier. The last time profits contracted on a year-over-year basis was 2001," in a recession.

Fourth-quarter S&P profits fell as well.

Another problem with Fosler’s profits-into-jobs forecast is where U.S. companies are earning money. Domestic profits fell 4.6 percent in the third quarter, according to the Bureau of Economic Analysis’ National Income and Product Accounts. "Domestic profits have to do with hiring here," Kasriel said.

The labor market isn’t OK. Initial jobless claims, the number of people receiving unemployment benefits and the unemployment rate all are trending higher. Consumer confidence, another indicator published each month by the Conference Board, is sagging.

Kasriel is flummoxed by the seeming disconnect between the Conference Board’s forecast and the group’s indicators.

"Almost every economic indicator published by the Conference Board is pointing toward recession, yet Fosler’s 2008 real GDP growth forecast in the February Blue Chip survey was 2.3 percent, among the highest estimates," he said. "Why is Ms. Fosler so optimistic when the indicators her organization publishes imply much weaker economic performance?"

CAROLINE BAUM IS A BLOOMBERG NEWS COLUMNIST.

cabaum@bloomberg.net

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