ECRI's Achuthan Explains New US Recession, Contagion Among Leading Indicators

If you missed it, on September 30, 2011, ECRI (Economic Cycle Research Institute) publicly announced that the U.S. economy was tipping into recession. Lakshman Achuthan, co-founder of ECRI, hit the media HARD after that. He was interviewed on WSJ NewsHub, The Daily Ticker, CNN, Bloomberg TV, CNBC Squawk Box and Bloomberg Surveillance. I embedded the Bloomberg and Daily Ticker interviews below. He thinks it will get a lot worse from here as "contagion among the forward looking indicators" spreads like a wildfire. And most importantly, he said he wouldn't be surprised if the unemployment rate hit double digits.

ECRI Weekly Leading Index going back to 2005 (Source: ECRI)

Interesting points Achuthan made during his interviews.
  • During recessions you get in a vicious cycle of "lower sales, lower production, lower employment, lower income, and back to lower sales."
  • Sees deadly combination of contagion in non-financial services, manufacturing and exports.
  • Government spending will go up as tax receipts go down.
  • Recessions kill inflation.
  • We're in an era of more frequent recessions and bear markets, which elevates the equity risk premium and lowers government bond yields (like in Japan).
  • 1799-1929 90% of expansions were 3 years or less, 1970-1981 2/3 expansions were 3 years or less.
  • If there's an exogenous shock like the Lehman bankruptcy, but in Europe, recession could overshoot.

Mish's Global Economic Analysis had an interesting post analyzing the timing of ECRI's recent recession calls. I wonder what Achuthan thinks of these positive (or positive trending) economic data points recently. The Citigroup Economic Surprise Index, originally noted by JPM Chief Equity Strategist Thomas Lee at Business Insider, has been trending higher since June (-117 on 6/3/2011 versus -14.70 today). The U.S. added 103,000 jobs in September (45,000 from telecommunication strikers returning to work), but the U6 rate (underemployment rate) rose to 16.5% in September from 16.2% in August. Carloads in the AAR weekly rail traffic report showed a year-over-year gain of 4.7% ending 10/1/2011, but the ECRI weekly leading index fell again last week to 121.2 (-8.1%) from 121.8 (-7.2%). See the chart above courtesy of free ECRI xls data. The funny part is, technical analysis worked perfectly on the index as you can see. If you don't know what to make of all this, the markets (hopefully the ones publicly available) will make the decision for you.

To give ECRI credit, on June 13, 2011, Achuthan told WSJ that his long leading indicators were predicting a cyclical economic slowdown for the U.S.

From ECRI's press release.

"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.”