ECONOMIC RESEARCH COMMITTEE PREDICTS UNSTABILITY

"We have not yet reached the end of business unsettlement. The outlook for the next three to six months is the inauguration of price recessions among various basic commodities heretofore unaffected, the extension of price revisions to retail markets, an increase in the number of business failures, easier money as the result of the release of credit by liquidation in commodity market and an increase of security prices," is the forecast of the Advance Letter on General Business Conditions issued recently by the University Committee on Economic Research.

The time in the business cycle when a panic would have occurred, if we were to have one, has passed, according to this letter, which is the latest of a series issued to the subscribers of the Review of Economic Statistics. The movement of rates on commercial paper and of speculation indicates that the liquidation in commodity markets will end some time between December, 1920, and April, 1921. The action of the Federal Reserve Banks in increasing rates and restricting credit practically insured a business readjustment unaccompanied by a financial panic. For "higher interest rates do not spell disaster, but safety, provided they are applied in time." In the opinion or Professor W. M. Persons, statistician of the committee, if we had the old banking system which existed prior to 1914, the present crisis would very likely have seen expansion to the bursting point. In regard to the Boston banking trouble, Professor Persons stated, "I believe that the failures of the trust companies were purely local phenomena, and do not indicate weakness in the general banking situation, even in Boston."

Forecast of Great Value

These prophecies come with special interest and significance at a time of such general financial uncertainty, and from an organization that has been so successful in previous forecasts. As early as December, 1919, the committee predicted the recession of commodity prices some time between the spring and fall of this year. In January, 1920, a definite announcement was made declaring that the recent recession in speculative activities led to the expectation of a check in the rise of prices early in the period between April and September. The marked drop of prices in April bore out this forecast surprisingly well. This astonishing accuracy has caused several large firms to base their financial policy entirely on the reports of the committee.

This statistical work dates back to 1917, when the University appointed a Committee on Economic Research. Investigation of methods of interpreting fundamental business statistics, with a view to ascertaining whether it was possible to treat such statistics in a manner that would make them more valuable both for business and scientific purposes, was the first field undertaken. To conduct this investigation the committee engaged Professor Persons, formerly of Dartmouth and Colorado Colleges, who in 1917 served as Lecturer in Economics at the University. He was also the author of many scientific papers dealing with business statistics in a new manner which appeared to promise important results. Professor Persons began work for the committee in September, 1917, and his investigations have reached a point which justifies the belief that he has perfected a new and most valuable method of handling fundamental business statistics.

Service to Business Men

As a result of the interest aroused by these investigations, the committee decided to offer to business men for the year 1919 a forecasting service, based on these new methods of statistical analysis. The inauguration of this service under the abnormal economic situation resulting from the World War made the work extremely difficult and necessarily of an experimental nature. It was found necessary to charge a fee of $100 and to secure at least 200 subscribers in order to finance the undertaking. Ready support, sufficient to warrant continuance, was met with; the subscriptions have steadily grown and now number over 400.

The committee now issues three publications. A Monthly Review appears with an index of business conditions in the United States and Europe, supplemented by occasional studies on economic problems of current interest. Advance Letters, coming out at the beginning and middle of each month, give the earliest possible notice of the movements of the forecaster. Every effort is made to bring these letters up to date, a novel form being employed by which it is possible to prepare the chart for printing within a few hours. The third publication is a Supplement, issued several times a year, which presents reports of special investigations of larger interest.

New Methods Used

The methods used in the construction of the Index of Business Conditions are new. The Index has as an object to set forth, first, the conditions in individual industries; second, the general business situation; and third, the probable business developments in the immediate future. Before definite conclusions are drawn from statistical date, underlying economic conditions are investigated by analyzing the conditions surrounding the industries or institutions used as sources of data, by studying the functions of such industries in our business organization, and by determining the reliability of the data. Variations due to gradual growth or "secular trend" and to seasonal fluctuations characteristic of every industry are carefully eliminated; while allowance is made for other causes which have no part in the normal course of the business cycle. The various series which appear to have most in common in the character and time of their fluctuations are then grouped together. They naturally divide themselves into three groups of which one, that covering the activities of speculation in securities, predicts the movements of the others accurately and in good time to be of service for practical business uses.

The first Index, constructed for the period of 1903-1914, predicted all the major movements of industry from eight to twelve months in advance of their occurrence. The current Index began in November, 1918, and appears to be running true to pre-war form. Since the Armistice it has correctly forstold wholesale commodity price fluctuations and general business activity, in spite of the unsettled conditions which have prevailed