U.S. “Skating On Thin Ice”

September 18, 2011
By

Lakshman Achuthan, head of the Economic Cycle Research Institute has become progressively more alarmed in recent weeks. In 2010 he argued with those who felt we would enter a recession in the Summer of 2010, saying the leading indicators from the ECRI showed a sharp, but brief, slowdown that would avoid a recession. You can watch his previous interviews we have posted from this this Summer when he announced that a global slowdown was certain as well as at the end of August when he said the slowdown was going to be pervasive and extend for several quarters.

Now the ECRI’s leading indicators are pointing toward a very high risk of recession.

While all the indicators the ECRI uses are not publicly available, Doug Short does a regular update and overview of the ECRI Weekly Leading Index (WLI). The latest can be found here. here is the most recent chart of the WLI:

 

In a recent appearance on NPR’s All Things Considered Achuthan tells Guy Raz “We are skating on very thin ice.” You can listen to the three minute interview here. Below are key points from the accompanying article:

Achuthan says the jury is still out on whether the U.S. will go into another recession, but he suspects that it will be clear one way or the other by the end of November…”The risk of a new recession is quite high,” he says…If we do have a double-dip recession, Achuthan says, the people who are already having trouble finding work and paying bills are already in a depression and that they “are going to suffer more.”

“It poses massive problems for policymakers because a new recession automatically increases all of these expenditures out of the public sector, while at the same time dramatically decreasing all their revenue,” he says. “So there’s even less ability to help the people who are hurting the most.”

We have been arguing for several years now that due to the need for the US to reduce debt (deleverage) and other factors we should expect for growth to be more sluggish, volatile and fragile than typical. That used to be an out of consensus view with most arguing that the recovery would exhibit the same “snapback” patterns of the past. Achuthan argues that not only were expectations for a vigorous recovery wrong in retrospect, there was never any reason to believe such an outcome was likely:

Some economists argue that right now we are just in a period of slow growth, not unlike that of the early 1980s. They say there are signs of a turnaround in the near future. Achuthan argues there is no evidence to support that point of view.

“This is very different than the early 1980s. The issues that ail the U.S. economy and the jobs market today are not things that result from nearby events. What we’re living through and dealing with now has been building for decades,” he says. “If you look at the data, you see that the pace of expansion has been stair-stepping down ever since the 1970s, on all counts — on production, how much can we produce, how many jobs can we create, how much money do we make, how much do we sell. These are all trending down.”

So, Achuthan says, “those who were expecting we should have a vigorous recovery had no right to do so.”

Nor is this process likely over:

In fact, he says, it is likely that the U.S. will see more frequent recessions than it’s used to for the next five or 10 years.

“The best news I can give you is that cycles do turn, but there is going to be a lot of pain in between,” he says.

For more insight into why Achuthan believes we will see an era of more frequent recessions, we suggest this interview from July 2010 .

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