Since 2011, Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has been taking a lot of heat for his controversial call that the U.S. economy would fall into a recession.
In an appearance with Bloomberg’s Tom Keene last November, Achuthan clarified that based on the four official recession indicators considered by the NBER — the folks who date recession — the U.S. fell into recession in July 2012. He also said we would know that the U.S. fell into recession by the end of 2012.
Since then, the ECRI head had been off the radar.
Today, Achuthan emailed to Business Insider a brand new presentation titled “The U.S. Business Cycle in the Context of the Yo-Yo Years.” “Yo-Yo Years” was a concept he introduced in March 2012. (Download it here.)
In 17 pages, Achuthan makes his best effort to defend his recession call.
He begins by looking at what gross domestic product (GDP) and gross domestic income (GDI) are telling us. First, GDP:As it happened, in January 2013 there was a negative GDP print, consistent with our belief that the recession had begun around mid-2012.
Here we have a chart of year-over-year nominal GDP growth which, after last week’s revision of real GDP growth from -0.1% to 0.1%, is still down to 3.5%.
This chart begins in the early 1980s. Based on the full 65 years of historical data, nominal GDP growth below 3.7%, which is marked off by the horizontal line, has always occurred in a recessionary context – without exception.
This chart is consistent with a mild recession. Yet, we have all heard lots of commentary that we’re in a “2% economy” – not that great, but as long as the economy stayed above recessionary stall speed it would be OK.
Photo: Economic Cycle Research Institute
And then he considers GDI:About two years ago the Federal Reserve Board published a study that investigated various stall-speed measures, including GDP and Gross Domestic Income (GDI), which should theoretically be identical to GDP but for the statistical discrepancy.
The Fed study concluded that the best stall-speed measure may be the two-quarter annualized growth rate of real GDI, and when that measure fell below 2% it was a recession signal, because the economy would stall out.
Here is a historical chart of the two-quarter annualized per cent change in GDI, with a horizontal line placed at the Fed’s 2% stall- speed threshold. You can see why they believe that historically that has been a fairly reliable recession signal, because it has never dropped clearly below that threshold without there being a recession.
It is not unusual to see this measure drop below the 2% stall speed, pop up briefly, and then fall back as recession begins. So where were we in 2012?
All the way to the right of this 65-year chart we see this measure decline in the second quarter of 2012 to 1.5%, below the stall-speed threshold. And in the third quarter of 2012 it dropped further to 0.4%. So by last summer it had already spent two quarters below stall speed.
You may recall that in the run-up to last fall’s election, the jobless rate was falling so rapidly that some even questioned how real the decline was. But in light of the Fed’s stall-speed measure, their pledge last year of ongoing quantitative easing makes more sense.
While we have yet to hear any of the official agencies declare that the U.S. is indeed in recession, Achuthan continues to be convinced that the numbers speak for themselves.
“So that is the evidence from GDP and GDI, and you can begin to draw your own conclusions about the U.S. economy and if it is in recession,” said Achuthan.
“But what about the other key coincident indicators?”
He warns that the four official recession indicators are impacted by temporary distortions. Considering that, he believes July was a high point for three of the measures.
When you look at housing in absolute terms, it's clear that housing plays a small role in the economy.
Also, the market prices of exchange-traded assets are misleading indicators because they can be skew by monetary policy.
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