ECRI's Recession Forecasting & The Business Cycle
At the end of last September marquee economic business cycle research and forecasting group ECRI (Economic Cycle Research Institute) declared that a new U.S. recession was imminent, and that there would be nothing that the government, including the Federal Reserve, could do to prevent it.
Since that time the economy has actually picked up a bit, seeing fully two quarters of stronger-than-expected GDP and employment growth. Despite this, ECRI managing director Lakshman Achuthan reaffirms the position that in a free market economy, government action can not change the business cycle.
But is this really true? And perhaps more interesting, does he actually even really believe this?.
Let's take a look at his own words as recent as 2008 regarding the Great Recession:
Source: CNNMoney Slowdown Could Have Been Avoided
That article continues...He argues that the economic stimulus package passed by Congress this year is too late to help many consumers and businesses and that the Federal Reserve was too timid when it started trimming interest rates last fall.
Since then the Fed has aggressively cut rates, most recently lowering them by three-quarters of a percentage point at its meeting Tuesday.
Financial pain hits close to home
"If they had done all this in the fourth quarter, I think we'd be having a different discussion," he said. "We might not have had Bear," he added, referring to the fire sale purchase of brokerage firm Bear Stearns (BSC, Fortune 500) by JPMorgan Chase (JPM, Fortune 500) that the Fed helped arrange over the weekend to avoid a collapse of Bear Stearns.
The ECRI, which forecasts a number of key economic readings such as employment, inflation and production from various business sectors, had been reluctant to join the rising tide of economists arguing that the economy has fallen into a recession. But it changed its call Thursday.
Achuthan said the tipping point for his firm's recession call was when its leading index for non-financial services, a sector of the economy that accounts for 62% of jobs, turned negative.
Although Achuthan said he saw weakness in the U.S. economy last fall, he did not make a recession forecast at that time because he thought it was possible the government could have done something then to prevent a recession.
(Larger font size added for emphasis)
So Achuthan states now that he does not believe governments can stave off recessions, but did so in 2008. Interesting. I suppose in his defense this apparent discrepancy requires some explanation that is plausible, but hopefully not so complex as to knot him up into a pretzel.
In the simplest of possible plausible explanations, perhaps Achuthan actually does believe that governments have the capability of managing the business cycle, but continually fail to do so because of the inherent dysfunction of governments.
But this would be at least in some conflict with what the ECRI's most recent assertions have been:
ECRIRevoking Recession: 48th Time's the Charm?
May 09, 2012
For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession.
Has personal income growth ever remained this low for three months without the economy going into recession? The answer is no.
The chart depicts real personal income growth over the last 60 years, with vertical shaded bands representing recessions, and the horizontal black line marking its latest reading. Except for three one-month dips[i], income growth has not been nearly this weak in 60 years without a recession - and certainly never for three months in a row.
So how can this be happening with such an accommodative Fed? After all, in spite of more “money printing” than anyone has ever seen, actual U.S. economic growth - including income and job growth - is slowing. In fact, in the last 60 years we have not seen a slowdown where year-over-year payroll job growth has dropped this low without a recession.
The unfortunate reality is that Fed is “pushing on a string.” But, in any case, the larger point is that the business cycle cannot be repealed in a free-market economy. Yet most people think recessions amount to some sort of “failure” and, if policy makers just did the “right thing,” they could stave off recession indefinitely, meaning they could get rid of the business cycle. Ironically, one hears this from many proponents of the free market, even though the business cycle is part and parcel of how every free-market economy operates.
In the past 222 years, the U.S. economy has experienced 47 recessions. So, are we to now believe that if the Fed prints enough money, it can postpone the 48th recession indefinitely? Is it plausible that, in an era of deleveraging and very weak income growth, more money printing and borrowing will increase consumption enough to keep the economy out of recession?
As students of the business cycle, we admit to being hopelessly biased in our belief that it is simply not possible to repeal recessions in market economies. It is not whether there will be a recession, but when. And ECRI’s indicators are telling us that a recession is likely to begin by mid-year, if not sooner, though this may not become obvious until the end of the year.
[i]As the chart shows, there was a one-month spike down in income growth below its current reading in December 2005 due to the comparison with December 2004 data that included a one-time $32 billion dividend payout from Microsoft. Owing to concerns about tax law changes during the Clinton administration that induced people to move as much of their earnings as possible from early 1994 into December 1993, the resulting adverse comparison made December 1994 income growth show a one-month drop down almost to its current reading. Finally, President Clinton’s election also caused people concerned about tax hikes to shift as much of their earnings as possible to December 1992, causing earnings to then fall through March 1993, which therefore shows a one-month dip in earnings growth to just below the current threshold.
Since that time the economy has actually picked up a bit, seeing fully two quarters of stronger-than-expected GDP and employment growth. Despite this, ECRI managing director Lakshman Achuthan reaffirms the position that in a free market economy, government action can not change the business cycle.
But is this really true? And perhaps more interesting, does he actually even really believe this?.
Let's take a look at his own words as recent as 2008 regarding the Great Recession:
Source: CNNMoney Slowdown Could Have Been Avoided
That article continues...He argues that the economic stimulus package passed by Congress this year is too late to help many consumers and businesses and that the Federal Reserve was too timid when it started trimming interest rates last fall.
Since then the Fed has aggressively cut rates, most recently lowering them by three-quarters of a percentage point at its meeting Tuesday.
Financial pain hits close to home
"If they had done all this in the fourth quarter, I think we'd be having a different discussion," he said. "We might not have had Bear," he added, referring to the fire sale purchase of brokerage firm Bear Stearns (BSC, Fortune 500) by JPMorgan Chase (JPM, Fortune 500) that the Fed helped arrange over the weekend to avoid a collapse of Bear Stearns.
The ECRI, which forecasts a number of key economic readings such as employment, inflation and production from various business sectors, had been reluctant to join the rising tide of economists arguing that the economy has fallen into a recession. But it changed its call Thursday.
Achuthan said the tipping point for his firm's recession call was when its leading index for non-financial services, a sector of the economy that accounts for 62% of jobs, turned negative.
Although Achuthan said he saw weakness in the U.S. economy last fall, he did not make a recession forecast at that time because he thought it was possible the government could have done something then to prevent a recession.
(Larger font size added for emphasis)
So Achuthan states now that he does not believe governments can stave off recessions, but did so in 2008. Interesting. I suppose in his defense this apparent discrepancy requires some explanation that is plausible, but hopefully not so complex as to knot him up into a pretzel.
In the simplest of possible plausible explanations, perhaps Achuthan actually does believe that governments have the capability of managing the business cycle, but continually fail to do so because of the inherent dysfunction of governments.
But this would be at least in some conflict with what the ECRI's most recent assertions have been:
ECRIRevoking Recession: 48th Time's the Charm?
May 09, 2012
For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession.
Has personal income growth ever remained this low for three months without the economy going into recession? The answer is no.
The chart depicts real personal income growth over the last 60 years, with vertical shaded bands representing recessions, and the horizontal black line marking its latest reading. Except for three one-month dips[i], income growth has not been nearly this weak in 60 years without a recession - and certainly never for three months in a row.
So how can this be happening with such an accommodative Fed? After all, in spite of more “money printing” than anyone has ever seen, actual U.S. economic growth - including income and job growth - is slowing. In fact, in the last 60 years we have not seen a slowdown where year-over-year payroll job growth has dropped this low without a recession.
The unfortunate reality is that Fed is “pushing on a string.” But, in any case, the larger point is that the business cycle cannot be repealed in a free-market economy. Yet most people think recessions amount to some sort of “failure” and, if policy makers just did the “right thing,” they could stave off recession indefinitely, meaning they could get rid of the business cycle. Ironically, one hears this from many proponents of the free market, even though the business cycle is part and parcel of how every free-market economy operates.
In the past 222 years, the U.S. economy has experienced 47 recessions. So, are we to now believe that if the Fed prints enough money, it can postpone the 48th recession indefinitely? Is it plausible that, in an era of deleveraging and very weak income growth, more money printing and borrowing will increase consumption enough to keep the economy out of recession?
As students of the business cycle, we admit to being hopelessly biased in our belief that it is simply not possible to repeal recessions in market economies. It is not whether there will be a recession, but when. And ECRI’s indicators are telling us that a recession is likely to begin by mid-year, if not sooner, though this may not become obvious until the end of the year.
[i]As the chart shows, there was a one-month spike down in income growth below its current reading in December 2005 due to the comparison with December 2004 data that included a one-time $32 billion dividend payout from Microsoft. Owing to concerns about tax law changes during the Clinton administration that induced people to move as much of their earnings as possible from early 1994 into December 1993, the resulting adverse comparison made December 1994 income growth show a one-month drop down almost to its current reading. Finally, President Clinton’s election also caused people concerned about tax hikes to shift as much of their earnings as possible to December 1992, causing earnings to then fall through March 1993, which therefore shows a one-month dip in earnings growth to just below the current threshold.