Ignore 'Fiscal Cliff,' US Is in Recession: ECRI's Achuthan
The U.S. economy grew 2.7% in the third quarter, up from a previously reported 2% the government reported Thursday. But the guts of the report raised some concern, notably a big increase in inventories and a big downward revision to consumer spending.
For most economists, the GDP report provides further evidence of a U.S. economy that's growing modestly, but far from robustly. For Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, the report is a distraction from the real story: the U.S. economy is already in recession.
"The evidence is starting to mount a recession is already underway, and we're a few months into it," he says, suggesting the downturn began in July.
A quick recap since Achuthan's calls are often controversial and he would say misunderstood: In September 2011, ECRI predicted a recession was "inescapable" but Achuthan says he was "intentionally ambiguous" about the timing. In December that year, he told Bloomberg that the recession was likely to start in the first quarter and, barring that, in the first half of 2012. (Here's a comprehensive review of Achuthan's appearances and recession calls for those who want to watch and judge for themselves.)
Achuthan defended and reiterated that call on The Daily Ticker in May 2012. See: ECRI's Lakshman Achuthan: No, I'm Not Wrong — We're Still Headed For Recession
In terms of evidence for today's call that a recession began last summer, Achuthan says that three of the four indicators the National Bureau of Economic Research (NBER) uses in its official recession calls peaked in mid-summer: production, incomes and sales, as measured by the Census Bureau.
Jobs Set to Turn Down
"Employment is the odd man out" of the NBER's four key indicators, he admits. "[But] we do believe jobs are going to turn down and join the other indicators in their downturns" -- suggesting 2013 could get off to a very rough start.
Historically speaking, it's not unusual for the jobs market to be improving at the start of a recession, according to Achuthan, citing the 1973-75 recession as the most extreme example. Similarly, it's not unusual for GDP to be positive at the start of a recession — the oft cited "two quarters of negative GDP" is neither a true definition of a recession nor how the NBER ultimately measures them.
"What we're seeing here" with jobs and GDP "is not inconsistent" with historic patterns, he says.
There are two major reasons why the recession is not obvious to most observers -- with the notable exception of the millions of Americans who are out of work and believe the 'Great Recession' never ended:
Risk On: ost economists work on Wall Street and are thus acutely sensitive to the performance of the financial markets, which have rallied strongly since the lows of March 2009. This, Achuthan says, explains why a new Bloomberg poll of global investors shows such optimism, with 67% saying the global economy is stable or improving, up from 50% in September.
"Industrial production is falling in all of the G7 nations and in every 'BRICS' economy, including South Africa, except for China," he notes. "That's a pretty pervasive decline that seems to be lost on global investors [who are] perhaps distracted by or attracted to central bank easing."
As an aside, Achuthan believes the Fed's "all in" strategy is a sign Ben Bernanke sees the same indicators as ECRI. But he's highly skeptical the central bank can prevent the downturn and fears they may make things worse because "certain things that should fail in a recession to make room for recovery aren't allowed to fail."
No Earth-Shattering Kaboom: "People often associate recessions with a shock" but historically that's not the case, Achuthan says. For example, the economy was already well in recession when Lehman Brothers went bankrupt in 2008 and when the planes hit the World Trade Center in 2011, despite the popular notion that those events triggered the respective downturns.
Notably, ECRI's call is not at all predicated on the fiscal cliff negotiations that are getting so much attention. But going over the cliff might be the kind of "shock" that people typically associate with recessions -- even if they're already underway.
Correction: An earlier version of this story incorrectly stated that "In September 2011, ECRI predicted a recession would occur in 2011."