The economy’s on a roll, or so we’re told. The latest smoking gun is Friday’s employment report. Even the bond market appears convinced that there’s more growth percolating than previously realized. In turn, the bubbling labor market inspires fears of higher inflation among traders of debt. Reflecting the sentiment, the yield on the 10-year Treasury jumped sharply on Friday, closing at 4.96%. The last time the 10-year explored such yield heights, in the summer of 2002, Greenspan’s Fed was losing sleep over deflation anxiety.
The opposite risk now threatens. That, at least, is the new new message from the fixed-income set. But while some say it’s about time the bond market woke up, a few lone voices in the financial wilderness warn of something else, namely, the possibility that a slowdown may be lurking just over the horizon, and so inflation may not be lurking in the shadows after all.
In the interest of exploring how the other half thinks, we called one of the leading analysts who’s braving the headwinds of contrarianism at this juncture: Lakshman Achuthan, managing director of the Economic Cycle Research Institute, an independent research shop in New York. ECRI’s forte is one of applying a disciplined, quantitative analysis to the economic data in search of identifying turning points in cycles. On that score, this respected shop points to two warning signs at this moment, Achuthan tells The Capital Spectator. Housing and the global industrial sector may surprise with weakness, relative to the crowd’s current expectations, he advises. What’s more, Achuthan says that ECRI’s widely monitored FIG, or future inflation gauge, is counseling that inflationary pressures will soon wane.
Given the bullish economic news of late, some may be inclined to dismiss such forecasts. But ECRI is not just another forecasting shop. Indeed, it has an impressive record in calling turning points in the economy, thanks largely to a methodology that’s one of the more intelligently designed systems for discerning the future. For details on the methodology, which leverages decades of cycle-oriented macroeconomic research, ECRI’s book Beating the Business Cycle will satisfy. For a quicker fix on ECRI’s current take on what may lie ahead, here’s an excerpt from our Friday conversation with Achuthan.
Q: We keep reading that the economy’s doing fine. The bond market certainly seems to be throwing in the towel after seeing the strength in the March employment report. And that follows other numbers in previous weeks suggesting that the economy has a head of steam.
A: That’s an ok view near term. I wouldn’t argue with anything you just said for the next month or two or three. But once we get into second half of 2006, that logic falls apart.