December 9, 2011, Bob Brinker and Lakshman Achuthan Headed for Recession Showdown

December 9, 2011.....................................................................(comments)

Bob Brinker has said that he's positive the economy is NOT  headed for another recession.  On Moneytalk, Brinker has repeatedly denigrated those who are predicting a recession and he's focused like a laser on ECRI's Lakshman Achuthan, who said in September that the economy is "tipping into recession." Now Achuthan says we won't know one way or the other until this time next year.

Yesterday, Achuthan made a guest appearance on Bloomberg. He has not changed his mind about his recession forecast and he explains why. He also talks about the stock market as a recession indicator.  Here is a summary and excerpts from the video interview:

Dec. 8 (Bloomberg) -- Lakshman Achuthan, chief operations officer of the Economic Cycle Research Institute, talks about the U.S. economy. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday."

Tom: "You had a recession call, what happened?

Achuthan: "It's happening."

Tom: "I saw too many economists talking 3% GDP."

Achuthan: "I talked to you  right here September 30th. That was two months ago. A lot of economists, as they always do, are focusing on incoming data, a lot of which is coincident or short-leading. And there is, indeed, has been stronger coincident and short-leading data over the last couple of months,  since I saw you. So we learn from that....the recession very likely did not begin in Q3. I don't know about Q4 or the next couple of quarters......Well, in late September, we thought we were tipping into recession. We just don't know when it started."

Tom: "Explain this, this is really important.....There are two ways you look at a call. You look at the vector of the call -- the direction of the call,  and you look at the timing of the call. Amateurs look at the timing of the call. Oh, Laksman, you are in the time-out chair. You got it wrong. Pros look at the vector, or direction of the call. So you maintain the direction of your call."

Achuthan: "Yeah, we haven't switched  our call....If there's no recession in Q4 or the first half, then we're wrong. You're not going to know whether or not we're wrong until a year from now. Just to be very clear, jobs data comes in stronger...That means there's no recession, right? Wrong. In the last recession, which began in December of '07, jobs data didn't go negative for another couple of months. It was positive into the recession.  I'll give you an even freakier example, which is the 1973-75 recession. It took nine months inside the recession before jobs went negative....If you look at this kind of stuff....it's not a precise science."

Achuthan continues: "A recession is a contraction in production, employment....income and sales.....In the 2001 recession, we lost 3 million jobs.....Here, we've lost 8-something  million.....We've gained back 2-something....Here's the point, in the 2001 recession, for example, for those who were waiting for two negative quarters of GDP, you may not even get that.....In 2001, you never had two quarters straight of negative GDP, but yet you had 3 millions jobs lost.  So it was a real, bonafide, nasty recession. In the 2008 recession, all the way in August, a month before Lehman -- we were 8 months inside the recession. But if you're looking backwards, you don't see any negative GDP."

Achuthan said this about the following chart: "The downturn we have now is very different from the downturn in 2010 which did not persist. This downturn is persisting. That is a forward-looking indicator. So far, we've been talking about coincident data, production, jobs.... now casting backwards.....That forward looking data in the same period since I saw you two months is getting weaker. It's not turning up....

....So to my fellow forecasters out there. I'd say they're roughly in two camps. There are those that say the economy will continue to firm into next year. We reject that. There's nothing here that suggests that at all. I think there's a larger camp that says we are going to muddle through. We're going to get this kind of slow growth.....I'm going to point out that that has never happened. We never muddled through.... A market economy does not want to have a static state. It either accelerates or it decelerates, and these forward-looking cycle indicators say decelerates."

Tom:  "This chart shows personal disposable income -- inflation adjusted. Clearly an ugly chart that captures so much of our anxiety. What does the recent data show?"

Achuthan:   "There's the other half of the GDP report. Everybody got excited because GDP rose a couple of percent in Q3. Just before Thanksgiving, you got the other half of that report. A revision called the Gross Domestic Income.  Conceptually, it's the same thing. It just adds it up from the other side. It adds up all the income instead of all the purchases. In theory, they should match. They never do....

.....The problem here is that GDI tends to be the more accurate measure. GDP tends to get revised toward GDI, at least in recent years. The Fed has been focused on this. And GDI, in the last reading, was 0.3%....That's a far cry from two handle. That's a big gap......I read a Fed paper that suggests the revisions will go lower....The Fed points out, when you look at a two quarter annualized growth rate of GDI, if it gets to 2% or lower, that's a recessionary stall speed. Now that's been trending down for six quarters....The last reading is 0.28% on GDI."

Tom: "What does the ECRI work say about the stock market?" 

Achuthan: "Here's the one thing that I think a lot of  people sometimes forget, it's that the stock market is not the economy....We get caught up.....The stock market is a short leading indicator. It's imperfect. It makes mistakes on recession forecast......But if you look closer, the stock market gets the acceleration and deceleration of the economy pretty good....And I think if you step back from the last few weeks or couple of months and look at the big picture, the stock market has very clearly reacted to our growth rate slowdown call from last April."

Tom: "Here's a chart from the Congressional Budget Office.  It's on the edge of ECRI work....There's the current cycle, the white line, normalize to the middle of the chart. So you go past to the left, forward to the right. The yellow's normal. The glide path of that white line to the right ain't so pretty."

Achuthan: "There's a huge problem there.....Back in '08, in the middle of the last recession, we were able finally in hard data, not a forecast, present how the pace of each expansion since the 1970's has been getting lower and lower.....Plus I think we all agree the cycle of volatility has gone up. The economy hasn't gotten mellower......Volatility plus low trend equals more recessions. It's in that context that we are making this recession call."


Moneytalk, November 6th, Bob Brinker said: "My estimate is that we will see growth again in the fourth quarter, which means, where's the recession? You know, we have these private forecasters out there going around beating the drums of recession. Warning everybody that the US is going back into recession. Batten down the hatches and get in the bomb shelter because we are in a lot of economic trouble. That is what they say, but that's not what we see. So far, we see an economy that continues to grow slowly.......One of things that amazes me about the private firms that are forecasting a  recession in here is their conviction. I mean they talk about it like it's a fait accompli. They talk about it like it's for sure -- take it to the bank. Well I'm not taking it to the bank. What do you think about that? I think these forecasters are wrong, but I'll look forward to their apology....this is Moneytalk." 

So it looks like Bob Brinker and Lakshman Achuthan are headed for a showdown. Will Bob eat crow, or will Achuthan apologize? Please see my original coverage of this subject: October 20, 2011: "Lakshman and Bob in the Thunderdome. Two men enter, one man leaves"  LINK

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