State of Business: The Economy's DEW Line

The U.S. economy is behaving so well that no one seems to worry any more about the possibility of misbehavior. Even professionally pessimistic economists see no storms ahead. How can they be so sure?

The National Bureau of Economic Research every week receives a mass of suggestions from citizens about how to predict the course of the economy: by aspirin sales, race-track betting, blue print production, employment of temporary office help. Some of the suggestions actually make sense, but they are like so many popguns in the economic forecaster's arsenal. The nation's economists, for roughly the same reason as the U.S. Air Force, have developed their own DEW-line warning system to spot trouble on the horizon.

The Harbingers. Among the standard warning signs that economists rely on are such Government "leading indicators" as housing starts, job layoffs, business failures, new orders of durable goods, construction contracts and stock prices. But these indicators proved wrong in 1962, leading economists into a false recession scare. Often, such warning signals also come too late for the Government and businessmen to have a chance to cushion the fall, or perhaps avert it entirely. Figures on industrial production and personal income, for example, only confirm what has already happened.

Ideally, the economists want to spot a zig or a zag in the graphs that may mark the beginning of a trend. They now recognize that there are a few such signs that indicate an impending recession well in advance of an actual downturn. Like the blips on a DEW-line monitor, these signals are only warnings of impending crisis; they are not recessionary in themselves. The chief harbingers:

>A shift in the money supply. According to the University of Chicago's Milton Friedman, all modern recessions have followed significant declines in the growth of the money supply in pocketbooks and bank deposits. In each case, says Friedman, the warning lead time has been at least nine months.

> Size of industrial inventories as compared with sales. Overstocking was a big factor in the 1958 recession, but nowadays computers are used to keep inventories in closer balance with orders.

> Profit margins. The percentage of corporate profits to sales typically levels off or declines long before a recession sets in, and any steady decline eventually leads to a curtailment of expansion plans and production.

> Reduction in the average number of hours the industrial laborer works per week. This may indicate a slackening of production months before any point of severe layoffs or cutbacks.

Just in Case. None of these indicators are new. But economists believe that they have achieved a new sophistication in trend spotting. Using computers, the forecasters have reduced the time lag for most information-gathering from six months to two. And they are surer of what the information means, thanks to better reporting and more experience in analysis.