Where Do the Leaders Lead?

The stock market last week confirmed the experts' gloomier expectations. The Dow-Jones average took a net loss for the week of 12,80, dropping to 578,98 (see chart below). Though it was still some 40 points above the low it hit last June, the market had dropped nearly half of the 80 points that it recouped in August, effectively erasing any lingering hopes that the summer rally might still have some steam.

With the stock analyst's penchant for talking about the market as if it were a not-quite-bright child, Frederick Millett, research partner of Wall Street's Good-body & Co., suggested: "I think the market is trying to find a level at which it can get some support--and hasn't found it yet." But for most economists the market's behavior prompted concern beyond its immediate uncertainty, since stock prices are among the telltale statistics that are studied as "leading indicators": they are supposed to signal in advance which way the economy is going.

Thumbs Up. The Commerce Department's monthly Business Cycle Developments (TIME, Nov. 3, 1961) lists 30 leading indicators; when more than half of them point downward, many economists conclude that a recession is on the way. Including the sharp stock price drop, which is considered one of the most significant clues, 17 of the 30 now have thumbs down. On the bright side, two meaningful indicators, price per unit of labor costs and housing starts, were headed up last week (see chart).

John Langum, a Chicago economic consultant, sees "a real possibility that if we get a tax cut next year, and if it is not accompanied by a restrictive monetary policy, we shall start moving up." Another thumbs-up omen was reported last week by philanthropic fund-raising organizations; far from pinching pennies, the U.S. public is expected to shell out an alltime record sum of $8.7 billion to charitable causes in 1962. Perhaps the most hopeful pointer was Detroit's output of 472,000 cars last month, a September level unsurpassed since 1953.

Thumbs Down. On the other hand, economists point out that the indicators have not missed calling a single downturn since World War II. Some sound the alarm ten to twelve months ahead, while others point up short-term trends over three to six months. In the past, whenever the indicators have been misleading, it has often been the long-term leaders that pointed down while the short leaders continued to show strength. Last week both long and short leaders were weak. On this basis, such highly respected economists as Vice President Beryl Sprinkel of Chicago's Harris Trust & Savings Bank foresee a recession by year's end or at latest in first-quarter 1963.

Other economists point out that even the most reliable indicators jounce around so much from month to month that it is usually hard to tell whether an upsurge means the end of a slide or just a bump on the road. This uncertainty is compounded by the fact that some indicators are compiled weekly, some monthly, some quarterly. Thus they refer to different time periods and, to make their message even more confusing, are often subject to revision after they come out. Geoffrey Moore, of Manhattan's private and prestigious National Bureau of Economic Research--which first formulated the leading indicator system--points out that they are useful for calling the signals during the game, but are only foolproof for Monday morning quarterbacking. "An economist," says Moore, "can be pretty sure about the date of a recession--with in three or four months after it begins."

Business may still be buoyed by third-quarter earnings reports, which are expected to be mostly favorable. Another shot in the arm could come from heavy auto sales when the new models reach the salesrooms. But from the record of performance and the signals being flashed by the indicators, it is clear that until some new element enters the picture, the economy will continue to suffer from a basic lack of drive.

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