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Growth Signals Turn Yellow

Economic forecasts are like bellybuttons: Everyone's got one. But a few are worth more than others, and the J. Lo of U.S. economic forecasting in the past few years is Lakshman Achuthan at the Economic Cycle Research Institute in New York. He was among the few who accurately forecast the last recession and recovery.

In recent weeks, Achuthan's navel-gazing has produced a picture almost as disturbing as the movie Gigli. He says the U.S. economy is on track to slow down dramatically over the next three to six months -- an unexpected turn of events that could threaten the president's re-election bid, frustrate job-seekers and jeopardize corporate expansion plans.

The forecast is based on an abrupt downshift in his organization's venerable Weekly Leading Index, or WLI. The index forecast the 2001 U.S. recession in mid-2000 at a time when most economists and corporations saw only sunny skies ahead. It also forecast a recovery in 2002 at a time of much bear-market despair.

A Downturn Ahead?

The WLI is composed of eight signals that independently take the pulse of the economy at key pressure points. Some of those pressure points are still positive, but the majority has turned negative in recent weeks despite the upbeat outlook articulated by federal monetary and political officials, not to mention Wall Street brokerages.

The growth rate of the index, in fact, has hit its lowest level since late June 2003 -- a time when the model's expectations for economic strength were ramping up for good reason. Now the expectations are ramping down. "It's a pervasive decline," Achuthan said in an interview from his office in New York. "And there's not a lot countering it."

It's not just oil, which is a relatively minor factor in the economic forecast, weighing on the index. A host of reasons drive the ECRI's model into negative territory, among them the flattening money supply, diminishing mortgage applications, sinking industrial prices, falling stock prices and rising corporate bond yields. Rising employment and narrowing bond risk spreads are the only two positives it sees on the horizon.

Achuthan has just published an excellent book called Beating the Business Cycle with Anirvan Banerji, a contributor to TheStreet.com's sister site RealMoney. The book is about the methods ECRI uses to forecast the economy, and Achuthan says the growth slowdown is "by no means a three-alarm fire." He just wants to warn businesses and individuals that the above-trend 4.5% to 5% growth the country is now enjoying is likely to start gliding back down toward the long-term trend of 3% to 3.5% growth.

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