ACHUTHAN: Look At These Charts And Tell Me We're Not In Recession

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.

ecri gdp

Photo: Economic Cycle Research Institute

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.

ecri gdi

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?”

Click Here To See Achuthan’s Entire Argument That The US Is In Recession —>
 

Thanks to ECRI for giving us permission to feature this presentation.  Also, download Achuthan’s presentation “The Yo-Yo Years” here.

Achuthan argues that we are in a an era characterised by frequent recessions.

The last four time nominal GDP growth fell below 3.7%, the US was in recession.

Whenever GDI drops 'clearly below' 2%, the US has been in recession.

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.

Downward revisions to data following business cycle peaks have become increasingly pronounced.

Year-over-year growth in jobs has been falling.

Home prices are up, but that's not the same as housing activity.

Housing starts are up, but they have risen during past recessions too.

When you look at housing in absolute terms, it's clear that housing plays a small role in the economy.

Consumers and businesses are 'languishing at recessionary readings.'

Stock prices don't always fall during recessions.

In the 1920s, stock prices rose during recessions before crashing in the depression.

Also, the market prices of exchange-traded assets are misleading indicators because they can be skew by monetary policy.

Even the optimists at the CBO have been forced to scale back their optimism.

Consecutive quarters of negative earnings growth is on the rise, which coincide with recessions.

Plunges in the velocity of money also coincide with recessions.

A recession is not a calamity. But we're in a recession.

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