From the Wall Street Journal:
SAN FRANCISCO (MarketWatch) — The U.S. economy is headed for another
recession that government intervention cannot prevent, and such
downturns will occur more often, the Economic Cycle Research Institute
said Friday.
“This is a new recession; it’s not a double dip recession,” said
Lakshman Achuthan, co-founder of ECRI, in a telephone interview. “We
can’t avert it.”
ECRI’s Weekly Leading Index (WLI) growth indicator, reported Friday,
showed U.S. economic growth sliding to negative 7.2% for the week ended
Sept. 23 from negative 6.7% the week before, continuing a trend that
began in August. U.S. economic strength has been declining since May,
according to the WLI. Based on WLI and other indicators, ECRI has
correctly called the last three recessions and recoveries without
triggering any false alarms.
“We are seeing the weakness spread widely,” Achuthan said. “There’s a
contagion, like a wildfire among the forward-looking indicators that’s
not going to be snuffed out. The nature of a recession is not a
statistic. It’s a vicious feedback loop. Sales fall, production falls,
income falls and that depresses sales. We’re in that and it’s going to
run its course.”
Government’s effort to stimulate the economy, coming from both the
Federal Reserve and the Obama administration, is a case of too little,
too late, Achuthan observed. Politicians and central bankers simply
can’t move as fast as the business cycle, he said.
“Even in the best of times, government intervention is too small; it’s
dwarfed by the business cycle,” Achuthan said. “Earlier this year these
leading indicators were turning down and starting to weaken. Maybe there
was a slim chance back then. Today it’s water under the bridge.”
A second recession in as many years will lead to higher unemployment,
lower tax revenue, and poses obvious challenges for stocks, but
investors should get used to more frequent up-and-down cycles, Achuthan
said.
“We are in an era of more frequent recessions,” Achuthan noted. The
long, benevolent expansions of the 1980s and 1990s that created a
generation of stock investors and an equity culture in the U.S. are
relics of the past, he said. Going forward, he added, business cycles
will be shorter and sharper — as was true in the 1970s and in fact for
much of the country’s history.
Accordingly, since economic recoveries will be more fragile and easily
derailed, investors should expect continued heightened volatility for
stocks, he explained, “If you have a big negative shock it can take a mild- or even medium- intense recession and make it really bad,” Achuthan said.
That said, no indicators currently are suggesting the economy faces a
Great Recession comparable to 2008, Achuthan added. “But I can’t rule it
out either,” he said, “because the Great Recession was great in part
because of the shocks” including the failure of Lehman Brothers in
September 2008 that froze the financial markets.
Nowadays, Achuthan said, the debt crisis in Europe is the most obvious
potential trigger for a protracted breakdown in the global economy.
Still, he said, “If that crisis is somehow averted, it doesn’t mean were
OK. We’re still going to have a recession. If that crisis is not
averted, that recession has a likelihood of being worse.”
Investors, meanwhile, will have to adjust their thinking about how they buy and sell stocks, he added.
“Bear markets are associated with recession,” Achuthan said. “If you
have frequent recessions the equity risk premium gets elevated and can’t
come down.” In that scenario, stocks tend to trade in a range and
investors have to be more nimble and more watchful. It’s an environment
not unlike the sideways market of 1966-1982. In those years, said
Achuthan, “You could make a fortune if you weren’t buying and holding.”
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