ECRI's Lakshman Achuthan Reinforces Recession Call

ECRI's Lakshman Achuthan was on CNBC about a month ago reiterating his firms recession call made 5 months ago in September of 2011.  I'm not sure how long someone goes until they throw in the towel with their economic calls but when asked how long he would hold onto his call his says mid year.  All I know is that I respect Mr. Achuthan's opinions but I also realize that we would have missed a huge rally since the time of his call.




The focus of Achuthan call as he stresses centers around the decreasing trend in GDP.  ECRI reinforced their call on March 15 with a post on their website here.  Below are my key takeaways

• In contrast to the 3% GDP growth widely reported for the latest quarter, year-over-year growth in GDP, after peaking at 3½% in Q3/2010, has basically flatlined around 1½% for the last three quarters. Broad sales growth has followed a similar pattern, while the growth rates of personal income and industrial production have dropped to their lowest readings since the spring of 2010.
• The exception to this weakening pattern is year-over-year payroll job growth, which continued to improve through January, and was essentially flat in February. However, the empirical record shows that job growth typically turns down after downturns in consumer spending growth, not the other way around. Because consumer spending growth remains in a cyclical downturn, we expect job growth to start flagging in the coming months.  But the point remains that the USCI, which summarizes the definitive coincident economic indicators – including jobs – indicates declining growth in the U.S. economy.
• Most data, both public and private, are seasonally adjusted. But the nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years. This is normally a good thing, but when the economy fell off a cliff in Q4/2008 and Q1/2009, it was partly interpreted by these procedures as a lasting change in seasonal patterns. So, according to these programs, data from Q4 and Q1 would be expected thereafter to be relatively weak, and therefore automatically adjusted upwards. Our due diligence on this subject indicates a widespread problem, resulting in many recent economic headlines being skewed to the upside.
• However, we have no way to objectively measure the extent of these problems – either the upward bias for Q4 and Q1 or the downward bias for Q2 and Q3. Fortunately, year-over-year growth rates are naturally less susceptible to these seasonal issues because they involve comparisons to the same period a year earlier that is likely to be skewed the same way. In contrast, smoothed annualized growth rates, which we have traditionally preferred, presume proper seasonal adjustment. While the extent of the seasonal problem will be debated, monitoring year-over-year growth rates is a matter of simple prudence at this juncture not only for ECRI’s indexes but also for other economic data.  
• The bigger question is, can unprecedented, concerted global monetary policy action repeal the business cycle? The objective coincident and leading indexes that we have always monitored are still telling us that it cannot.