October 3, 2011
Is That A Recession Lurking In The Distance?
A new recession is inevitable, predicts the Economic Cycle Research Institute. "Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession," the consultancy announced on Friday. "And there’s nothing that policy makers can do to head it off."
"The vicious cycle is starting where lower sales, lower production, lower employment and lower income [leads] back to lower sales," ECRI co-founder Lakshman Achuthan told the Daily Ticker. And on Bloomberg TV he explained that another recession is coming because of "contagion in the forward-looking indicators." A new contraction is "inescapable," advised the co-author of Beating the Business Cycle, which outlines ECRI's methodology for analyzing the business cycle.
ECRI has a good record in calling turning points in the macro trend and so we should take Achuthan's warning seriously. The stock market indicator is looking bearish again too, offering some confirmation for the recession call. The S&P 500 is down fractionally as of Friday's close vs. a year ago. Every recession in the last 50 years has been accompanied by an annual decline and so the red ink isn't encouraging. Then again, let's not forget that not every annual loss in the stock market leads to a recession.
Meantime, the Treasury yield curve continues to suggest that the economy will muddle through. The term spread has a history of anticipating a new recession when short rates rise above long rates. By that standard, there's still reason for hope. As of Friday, the 3-month T-bill yielded roughly zero percent vs. a 1.9% rate on the 10 year note.
Some analysts respond by noting that the short rate is being manipulated by the Federal Reserve, which invalidates the yield curve's macro forecast. But isn't Fed manipulation of interest rates a constant in the affairs of monetary policy? True, the manipulation is extraordinary these days, but it's not clear if that detail negates the economic effects that generally flow from monetary policy.
Posted by jp at October 3, 2011 9:49 AM