Wednesday’s drop in the US service sector to the lowest level in two years took many economists by surprise, leading to a sell-off in the dollar and a boost to gold and commodities as expectations for further rate hikes this year diminished.
Lakshman Achuthan, co-Founder of the Economic Cycle Research Institute (ECRI), says it’s pretty clear that US growth is stalling (and will continue to do so) with the Fed “unusually late” in hiking rates at this point in the economic cycle.
In Thursday’s podcast he told Financial Sense Newshour listeners:
"We are seeing a continuation of what we saw in 2015, which is a slowdown in the growth rate of the economy…and that continues into 2016. It follows the path of what our forward looking indicators were suggesting and today those forward looking indicators continue to ease in their growth rate. So the bottom line is that the growth rate cycle downturn…is going to continue—it's not over yet."
ECRI specializes in developing leading economic indicators for tracking business cycles around the globe. Their longest leading index has yet to turn negative (and signal recession) but it is slowing, he says.
When leading and coincident economic data is strengthening, the economy has a greater ability to withstand shocks. Once they start to turn negative, Lakshman says any shock can push the economy into a recession and that is the big worry right now.
Lakshman also discusses their view on the effectiveness of Fed policy in preventing or combating another economic downturn and says that long-term trend growth in the US and elsewhere comes down to demographics and productivity, which is converging on a very meager 1%. “From a policy perspective, I'm afraid that's not something that central banks [can] fix no matter what they come up with,” says Lakshman.
Pronounced, Pervasive, and Persisent Slowdown
"First, just on the slowdown, you've got basically all of the key coincident data, if you look at year-over-year growth rates, they're all down to various degrees. So, you can look at production—like GDP or industrial production—those are down. And industrial production in particular as you mentioned is contracting. But then if you look at jobs growth, look at income, and you look at sales, and all of those measures I've just listed out—the coincident indicators that define the economic cycle and that are used in fact to date the cycle turns into growth or recession—...and those measures in terms of their growth rates now are in pronounced, pervasive, and persistent downturns. So, it is a fact that we are in a growth rate cycle slowdown and if you look at the data, it's been going on for over a year."
No Signs of an Upturn
"When we look forward, while nothing goes in a straight line, the odds of a sustained upturn in any of these sectors is relatively low. You could get because of these extreme moves in the manufacturing sector a little bouncing around but in order for there to be a pronounced, pervasive, and persistent upturn lasting more than a few months but making it into a few quarters you really need to see a turn in the overall economic cycle and, as I mentioned earlier, that's just not there yet. It'll come at some point. The question is do we avoid a recession as we wait for the upturn or does a recession need to be happen before the upturn happens. And on that, which is really the key question that I think is out there right now, I don't think it's been decided. When we look at our longest leading indicators, they continue to slow but they've not gone decisively negative..."
Window of Vulnerability
"The way we look at how a recession is made is through basically the combination of endogenous—the inherent cyclical drivers—joining with an exogenous shock. Now shocks are kind of occurring every once and a while. There's always something negative every quarter or two or three so there's no doubt that something will happen, the question is will it be recessionary. And these forward looking indicators like the long leading index...if they go negative you will have a window of vulnerability opening up where almost any shock would be a recessionary shock... In terms of monitoring the long leading index...it is not currently showing a window of vulnerability...but it also hasn't closed the door on that scenario so we have to keep a close eye on how it trends."
Fed Unusually Late
"They are unusually late [in hiking rates]. We asked the rhetorical question at the end of 2014, "As Good As It Gets?" given the long-term decline in trend growth and when there's a cyclical upturn you can pop above that a little bit but the end of 2014 was it and so it's been clear for a while and I think people are now just starting to realize it."
China Not Falling Off a Cliff...Yet
"China is a huge item on the shock radar that we're all looking at and trying to figure out where it might come from. And in China our forward indicators, the best thing we can say about them is that they haven't fallen off a cliff, so the kind of Armaggedon scenario is not appearing in our indicators yet...the best you can say is that they've flattened out, I can't say that they've turned up and that's what I mean...we just don't have the falling of a cliff moment in those forward looking indicators that some are concerned about. It doesn't mean it won't come at some point—I don't want to predict where these indicators are going next but at the moment you don't have that so it's possible that there's a little bit of a reprieve in the fear there over the next couple of months."
Converging on 1 percent
"The real issue here is...that long-term trend growth in United States has been stair-stepping down during successive expansions since the mid-70s and when you look at what gives us long-term trend growth in this economy or in other economies...it boils down to demographics growth—what's going on with the growth in the workforce—and productivity growth and those two components are what add up to real growth long term. And in the United States the CBO looking out 10 years has our demographics growth at about a half a percent. And if you look at productivity growth, over the past 5 years it's been running at about a half of a percent... So a half of a percent plus a half of a percent equals one percent, which is way lower than what anyone is planning on... From a policy perspective I'm afraid that's not something that central banks are going to be able to fix no matter what they come up with."
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