'THE business cycle isn't working as we used to know it,'' complains economist Leonard Lempert. ''It is terribly difficult to come up with something that makes sense.''
What prompted his complaint was a question about what is called the Index of Leading Economic Indicators. This government economic forecasting gauge fell in September for the second time in three months, the Commerce Department reported this week. As a matter of fact, it has risen only twice all year. That should signal a slowdown or recession ahead. But most economists figure the business expansion will move ahead modestly and merrily for at least another year. In the third quarter, the expansion certainly kept on going, rising at a 4.2 percent real rate.
The 11 statistical series that make up the leading indicators actually don't give much warning about the future of the economy, says James Glassman, an economist with Chemical Securities Inc. in New York. That may be one reason why the Commerce Department, as a cost-cutting move, is willing to turn over these indicators to the New York-based Conference Board, a private research group. That shift is supposed to happen in December.
Mr. Lempert helped develop the nation's statistical indicator system more than 40 years ago. Perhaps in recognition of this contribution, Commerce officials take the trouble to fax him the statistics he needs, as director of Statistical Indicator Associates in North Egremont, Mass., to publish a regular analysis of the business cycle. He presently sees a 3.5 chance out of 10 of a recession in the first half of 1996 - a cautious way to forecast.
Another economist, Arnold Moskowitz, notes a different unusual aspect of the current expansion: In the more than four years it has lasted, the cumulative growth in real gross domestic product, the output of goods and services, has been only 13 percent. In previous expansions, real growth in GDP was much greater. It was 24 percent in the comparable four years in the 1960s, 20 percent in the 1975-80 cycle, and 19 percent in the 1982-90 expansion. Despite its weak gain in business activity, the current expansion has shown one of the strongest productivity gains, low and declining inflation rates, low increases in unit labor costs, and very high rates of profitability, notes Mr. Moskowitz, who is chairman of the New York money-managing firm, Moskowitz Capital Consulting Inc. Wages and benefits rose only 2.7 percent in the year ended Sept. 30, the smallest increase since at least 1981.
Given this economic scene, Moskowitz holds that the Federal Reserve could drop interest rates another 0.5 percent by the end of the year, without reviving inflation. Employees are in no position to drive up wages. Only 11 percent are now in trade unions. Workers have become a flexible part of production, not an intractable obstacle, he says. One in 5 (24 million) of nonunion workers are part time. Some 2.4 million of these work for temporary agencies. Further, global competitive pressures and new technology restrain wage hikes.
Moskowitz notes that since the recovery began in March 1991, real sales per worker are up an impressive 14 percent and real profits per employee rose 130 percent, six times better than the previous two expansions in the economy. He says the unemployment rate could be brought down to 4.5 percent from its present 5.6 percent without prompting an acceleration in inflation. That 4.5 percent jobless rate is far lower than the 6 percent that many Fed economists maintain will kick off faster inflation.
Paul Kasriel, chief economist at the Northern Trust Company in Chicago, also says the Fed should lower interest rates. ''The economy is struggling,'' he says, forecasting real growth in output for the current quarter at a mere 1.5 to 1.75 percent annual rate. Auto sales were weaker than expected last month, retail sales are slow, and though house construction is up, he says, there is danger of an inventory buildup in unsold new homes.
A decline in commercial bank reserves since the start of 1994 troubles Robert Parks, a New York economic consultant. Similar declines, he says, signalled previous post World War II recessions. This time falling reserves will result in either very slow growth in the economy or another recession, he predicts.
Mr. Glassman doubts that forecast, saying the Fed acts quickly to counter a slowdown. But, he adds, many changes in the financial system mean the economy is sailing in ''uncharted territory.''