ECRI Forecasts The Coming Recession

DoctoRx’s favorite forecaster, other than the Daily Capitalist, Economic Cycle Research Institute called a “new recession” last week for its clients. According to the Doc, they have an excellent track record (see the graphic, below). Lakshman Achuthan said today:

“The U.S. economy is tipping into a new recession,” Achuthan, the group’s chief operations officer in New York, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “You have wildfire among the leading indicators across the board. Non-financial services plunging, manufacturing plunging, exports plunging. That is such a deadly combination.”

He said that we are shifting into an era of more frequent recessions. He projects that we will have at least a couple of quarters of a bad economy. What he is most concerned about is “contagion” whereby there is a “wildfire”  among the leading indicators— the “nonfinancial sector plunging, manufacturing plunging, exports plunging.” …  ”There is virtually nothing that can be done to prevent it.” …” The shortest period of recession is two quarters, but typically they run longer than that.” “Its a process …. so sales disappoint, production falls, employment falls,  income falls, sales fall again.”

He also appeared on CNBC this morning. Here is the video of his appearance:

You can hear the radio interview here.

Here is the statement ECRI issued on their web site:

U.S. Economy Tipping into Recession

Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off. 

ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down – before the Arab Spring and Japanese earthquake – to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.” 

Last year, amid the double-dip hysteria, we definitively ruled out an imminent recession based on leading indexes that began to turn up before QE2 was announced. Today, the key is that cyclical weakness is spreading widely from economic indicator to indicator in a telltale recessionary fashion. 

Why should ECRI’s recession call be heeded? Perhaps because, as The Economist has noted, we’ve correctly called three recessions without any false alarms in-between. In contrast, most of those who’ve accurately predicted a recession or two have also been guilty of crying wolf – in 2010, 2005, 2003, 1998, 1995, or 1987. 

A new recession isn’t simply a statistical event. It’s a vicious cycle that, once started, must run its course. Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator. That’s what a recession is all about. 

But how can we have a new recession just a couple of years after the last one officially ended? Isn’t this too short for an economic expansion? 

More than three years ago, before the Lehman debacle, we were already warning of a longstanding pattern of slowing growth: at least since the 1970s, the pace of U.S. growth – especially in GDP and jobs – has been stair-stepping down in successive economic expansions. We expected this pattern to persist in the new economic expansion after the recession ended, and it certainly did. We also pointed out – months before the recession ended – that because the “Great Moderation” of business cycles (from about 1985 to 2007) was now history, the resulting combination of higher cyclical volatility and lower trend growth would virtually dictate an era of more frequent recessions. 

So it comes as no surprise to us that, with the latest expansion only a couple of years old, we’re already facing a new recession. Actually, such short expansions are hardly unheard of. From 1799 to 1929, nearly 90% of U.S. expansions lasted three years or less, as did two of the three expansions between 1970 and 1981. In other words, such short expansions are unusual only with respect to recent decades.

It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar. 

Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.

Here is a graphic illustrating their track record:

We feel the same thing is now occurring, except that we will see more of a continued slump in the economy and persistent price inflation. We believe that QE is stoking price inflation and that the Fed will engage in QE3. Much of the problem will be related to the EU which will impact exports. More on this soon. We haven’t got access to ECRI’s methodology, since it is proprietary. But it is based on the work of economist Geoffrey Moore who measured the characteristics and duration of business cycles. Typically he see an initial slight decline in broad economic indicators (production, employment, income, trade), and then declines in new orders, construction contracts, the average workweek, stock prices, and the like. We use some of the same indicators, but mainly we base our forecasts on manufacturing and industrial production, money supply, credit indicators, and spending vs. savings, and other things.