New Tool

One reason for the difficulty in forecasting economic events is that predictions must be based largely on statistics that are often both old and incomplete. Last week the Commerce Department sought to clarify the numbers game by introducing a new monthly publication called Business Cycle Developments, prepared with the help of Manhattan's private and prestigious National Bureau of Economic Research. The 65-page guide, which Commerce will sell for $4 per year, gives economists an important new tool by 1) measuring more aspects of the U.S. business cycle than any other publication and 2) publishing the statistics much faster than ever before, thanks to the use of high-speed computers.

Sensitive Trio. The new guide brings together 78 sensitive business-cycle indicators and divides the bulk of them into three groups: "leaders,"' whose turns generally precede that of the economy as a whole; "laggers," which historically move behind the overall economy; and "coincident indicators." which move roughly in tandem with the general curve. The maze of wriggling charts is too complex for most laymen to cope with, but economists may well be able to use it to call economic shifts with greater accuracy and to alert businessmen to take effective contra-cyclical action. One theoretical case: if economists spotted several indicators pointing to overexpansion of inventories, they could warn businessmen in time to permit early and gradual reduction of inventory buying instead of the tardy and sharp cutbacks that usually lead to layoffs, plant shutdowns--and recession.

Two important new indicators make their debut in the Commerce Department booklet. One is the "Index of Wage and Salary Cost per Unit of Output"--which is the ratio of total U.S. manufacturing wage payments to U.S. industrial production. (This index is a lagger, which tends to fall during the early stages of a business expansion, because productivity then increases faster than wages do.) The other key indicator, which tends to lead the economic curve, is the ratio of wholesale prices that manufacturers receive for their goods to the price that they pay for labor. (It tends to lead the economy as a whole because manufacturers usually cut their labor costs by bringing in new efficiencies and automation in the later stages of a business recession and in the incipient stages of a business expansion. When this index rises, it thus indicates that productivity and profits are on the way up--a sign that good times are ahead.)

Pointing Up. Since the economy started up last winter, both of these indicators have moved in a favorable direction every month except one--September (see chart). September's unfavorable turn was due to a slide in industrial production that most economists regard as a temporary pause caused in large part by the auto strike and Hurricane Carla. The September pause did not upset Commerce Secretary Luther Hodges, who last week pointed ebulliently to the yellow-bound first issue of Business Cycle Develop ments and said: "The economy as reflected here moved up briskly during the first six months of the business expansion, and we think it will move forward significantly during the next six months." One reason for Hodges' hopes: of the 29 "leading" indicators in the new publication, a majority (16) currently point up.

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