Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) got a lot of praise and attention for predicting recent recessions, which were subsequently confirmed by the NBER.
However, it’s Achuthan’s more recent call that’s made him the target of immense criticism. Back in 2011 he said that the U.S. was marching into a recession. And in late 2012, he said that the recession started in mid-2012.
Although the NBER hasn’t yet told us the economy went into recession, Achuthan is sticking to his call.
Below is Business Insider’s exclusive Q&A with Achuthan. The transcript went out to subscribers of our “10 Things You Need To Know Before The Opening Bell” newsletter on Thursday morning. Sign up here to get the newsletter and more of these bonus items in your inbox every day.
BUSINESS INSIDER: What’s everyone getting wrong about the state of the economy right now?
LAKSHMAN ACHUTHAN: By second-half 2013, GDP growth was clearly picking up, but key ECRI leading indexes were weakening, pointing to decelerating growth, well before the weather began to worsen. In other words, the second half rebound was unlikely to persist the way a cyclical recovery typically does. So the weakness in U.S. economic growth goes far beyond the weather, and is likely to resurface after the post-weather bounce.
That’s why, in January, with a near-universal consensus that U.S. growth was about to “take off” and reach “escape velocity,” we dissented, saying on CNBC that “We just don’t see that when we’re looking at the data.”
A case in point is ECRI’s U.S. Leading Construction Index (USLCI), based on which we reported last summer that, with “construction sector growth poised to fall further, there are few drivers of a near-term rebound.” Sure enough, year-over-year (yoy) growth in new home sales has plunged deep into negative territory, while yoy investment growth in residential structures has also tumbled, with both at their worst readings in nearly three years.
Because both peaked long before the bad weather, it’s evident that their cyclical downturns aren’t really about the weather, and were correctly anticipated by the USLCI growth downturn, which has actually worsened since last summer. So the popular belief that housing will help drive an acceleration in U.S. growth this year will turn out to be a pipe dream.
BI: What do you think is the most worrisome sign in the economy?
LA: While the consensus keeps predicting an economy at “escape velocity,” with sustained 3%-plus growth, the reality remains far short of that, with yoy GDP growth hovering around 2% — what one quickly-forgotten Fed paper had called the economy’s “stall speed.” Meanwhile, business investment remains elusive and — as ECRI correctly predicted last summer — construction is decelerating, not accelerating, posing risks to the economy now highlighted by Janet Yellen.
In fact, demographics, along with productivity growth averaging less than 1% for the last three years, have helped keep U.S. trend growth so low that the inevitable growth slowdowns are more likely to end in recession. This is the hallmark of the “yo-yo years,” characterised by more frequent recessions than most expect. There’s no indication that this era will end soon, even if we see occasional 3%-plus GDP growth quarters, given that even Japan in its “lost decades” has seen 3%-plus GDP growth in 30% of the quarters since 1990.
BI: What do you think is the most underreported story in the economy?
LA: The steepening downturn in home price growth has been obvious in recent months, with yoy growth having peaked last spring for median new home prices, and last summer for median existing home prices. We predicted this downturn months in advance, over a year ago, and we expect it to continue.
BI: You’ve previously argued that the U.S. economy went into recession in 2012. What’s the status of that call?
LA: In hindsight, the epicentre of the recession looks to be the half-year spanning Q4 2012 and Q1 2013, which saw just 0.6% annualized GDP growth, mostly from a jump in agricultural inventories. GDP growth for those quarters could easily end up negative after revisions, much of which tend to arrive years after the fact. Nevertheless, just looking at the data in hand, yoy GDP growth during that period fell to lows never seen away from recessions in over half a century. We’ll see how the revisions change the picture in retrospect.
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