Contact

A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

News

 

No Double-Dip


US third quarter advanced gross domestic product (GDP) number has surprised most economists coming in at 3.5%, implying there has been a 3.5% GDP growth for the US economy in third quarter.

But, Laxman Achutan, Managing Director of the Economic Cycle Research Institute (ECRI) had told us in July that he saw the recession ending in Q3—that is the American summer. Having been proved right he said 3.5% was a stronger rise than what was seen in earlier recoveries.

However, he didn’t see a renewed downturn over the next few quarters. Though he expects the job scene in the US to improve, which would be driven by the services sector, but added the rise would be uneven.

The US GDP was broad-based and not tied to government spending alone, he said, adding, the sustainability of recovery depended on government exit strategy.

Here is a verbatim transcript of the exclusive interview with Laxman Achutan on CNBC-TV18. Also watch the accompanying video.

Q: What do you make of that advanced GDP number that came out, I know it’s advanced but it came in at 3.5%?

A: First and foremost it’s a strong confirmation that the recession has ended this summer and that we are in the early stage of recovery and that is the main thing. It’s not a forward looking indicator but it is important for those who have really doubted that the recession had ended and on that score that is important. The other thing that is important about the figures is that when you look under the hood, you see that there is broad-based growth and it’s not simply growth that is tied to government spending.

Q: Your institute was the first to forecast that the recession in America would end in Summer and that has exactly what has happened in the July-September quarter and that is exactly what has happened or at least this number proves that but do you anticipate even then that it would be as strong as 3.5% growth?

A: First, in the spring, back in April, the first step was forecasting the end of recession—the fact that the economy would experience a turning point in the cycle. As the summer began to unfold watching our forward looking the leading indicators, we began to suspect that this could be a stronger recovery than what most expected. And actually even with the preliminary numbers 3.5% that is a stronger first quarter of growth than that we have seen in the last two recoveries. The first quarter of the 2002 and in the 1991 recovery, was actually a bit weaker. So it’s a good start but it’s very important that in the next few months we begin to see some positives in job growth.

Q: You were quoted in the earlier part of this month to say that the risk of a double dip recession is very low and now what makes you or do you stand by that, what you need to see to be able to prove that right and some more information on the jobs situation would help?

A: On the issue of double-dip recession, we do not see a real downturn in the next few quarters or maybe upto a year for the economy. We are going to see many quarters in a row of positive growth on GDP. As for jobs, I do expect that around the beginning of the New Year that we will see positive headline job numbers. This will happen almost entirely on the back of the service sector of the US economy because the manufacturing sector has problems with employment that will not be cured by the end of this recession. So this is going to be somewhat an uneven jobs recovery and therefore not as strong as we would like but it will show positive jobs growth that will help sustain the recovery. There is two reasons I believe that is sustainable, one the primary reason is based on our leading indicators which continue to remain very healthy, they are not showing any new downturn but also looking inside the GDP Numbers, looking around at the other numbers coming out that are telling us about the current economy, what you are finding is that there is strength in the economy away from stimulus. There is services spending, non-durable goods spending and decent exports—all show that this recovery is sustainable.

Q: Why are you saying just a year, you are saying the recovery looks strong just for a year, why just that period and what do you use it happen thereafter. Secondly, you mentioned sustainability its one of the economists that commented right after that GDP data was released, the Chief Financial Economist of the Bank of Tokyo—Mitsubishi and he asked that the economy could continue to stand and he asked that the economy could continue to stand on its own two legs once the stimulus fades, so what kind of an impact will a potential exit strategy have on that sustainability issue?

A: We have tried for decades to forecast economic cycles better and farther ahead. And really the best we have ever been able to do is maybe upto four quarters or a year and everything has to be right to be able to see that far ahead. Our belief is that it may just not be that knowable, it may not be decided what is going to happen with the economy beyond a year from now. So as you suggest in the second part of the question, the exit strategy probably has a lot to do with how sustainable this recovery is. The last two recoveries saw monetary policy on hold for an extended period into the recovery. So if recent history—the last 20 years—is any guide there is no rush. I know there is a lot of concern about inflation because of all of the liquidity that has been added not only by the US but by other major central banks around the world and therefore the exit strategy timing, the fact that we are going to pull back liquidity is not a dispute—that is going to happen. But there is some eagerness to do it maybe sooner than need be. We are watching separate leading indicators of inflation which have not turned up in any scary way, which are telling us the time for an exit strategy is not yet. The longer one can hold off on an exit strategy, the more likely that this recovery would be able to grow old as it were. We will watch those future inflation indicators very closely for a better sense of when we do need to have an exit strategy, the timing to pull the trigger.

Q: If you were to leave the leading indicators aside, wear your hat just as an economist, tell me is it time to cheer this number or is it too early despite the strength that you see in some of your leading indicators data?

A: I would cheer the number. It’s a preliminary number, and the odds are that it will be revised up as time goes by in the subsequent revision this year and years from now. I believe this is a real business cycle recovery, it is not a sugar high or a flash in the pan that many are worried about and we will have to see. There are problems out there, we are simply not looking at this through rose-colored glasses, we know that the odds of more frequent recession than in the coming decade are actually higher, than they have been in over the last few decades and so we are going to have to keep a close eye and just hope that the next recession doesn’t come too soon.