Saturday, October 1, 2011

ECRI says that U.S. economy faces new recession

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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