Lakshman Achuthan is managing director of the Economic Cycle Research Institute and managing editor of ECRI’s forecasting publications. He frequently appears on CNBC and CNN and is quoted in The New York Times, Newsweek, and The Economist.
H.L.: What do you see ahead for the economy from the data on earnings, the deficit, Gross Domestic Product, jobs, personal income, housing, manufacturing, and consumer confidence?
L.A.: Not that any one of those items will improve in lockstep, however, with the recession ending this summer, many of the very negative headlines we’ve seen on these measures will start to abate. In essence, that this is the case is likely what the stock market has been suspicious of these past few months.
Basically what it boils down to is that despite a lot of disbelief, the recession is indeed drawing to a close sometime this summer, and this will begin to become clear as we receive new data on GDP, industrial production, employment, retail sales, and even income.
H.L.: How do you analyze the earnings so far?
L.A.: More often than not, the fact that companies have managed to beat expectations is very consistent with a change in the direction of economic growth. Essentially, during the recession companies adjusted their cost structure so they can be profitable with a lower level of activity. Any surprise in demand to the upside will improve company profits significantly.
H.L.: When might job losses finally stop?
L.A.: That depends on where you work. For the nation as a whole it may be that job losses continue through year-end, but underneath the headline numbers we should see non-manufacturing employment improve earlier, while manufacturing employment remains weak into next year.
H.L.: When do you see job levels back to where they were before the recession?
L.A.: That may take three or more years, because that would mean earning back close to 7 million jobs.
H.L.: When do you think the housing market will bottom out and recovery begin, which many feel is essential to economic health?
L.A.: That’s happening around now. In May, our leading indicators of the home-price cycle signaled the end to the current national home price decline. This is a very significant development, not only for homeowners, but also because it is so closely linked to the toxic assets that have ailed the banking system. But our forecast is really focused on the direction of home prices, and less a forecast of magnitude, so we cannot say that home prices will recover their losses in the foreseeable future.
H.L.: A healthy economy will depend on banks that are no longer paralyzed with the troves of toxic mortgage-backed securities that they’re trying to sell. When do you see banks freed up so they can lend normally again?
L.A.: Following the home price recovery that we believe is beginning, the drive that the toxic assets have on bank balance sheets will start to be reduced.
Now, it’s important to understand that under normal circumstances, growth in non-financial debt normally does not turn up until well after a recovery is underway. Given the added burden of the toxic debt it’s unlikely to happen earlier than normal. I don’t think you’ll see a lot of lending growth until sometime in 2010.
H.L.: Has the stock market actually been getting way ahead of itself?
L.A.: I would say until we see signs of a new downturn in economic growth following the recovery, which is beginning this summer, it’s possible for the stock market to continue rising. I’m not talking about trading events, like a correction of 5 or 10 percent. I’m talking about the risk of a new cyclical downturn in stock prices, and according to our farthest-seeing long-leading index that is not yet in sight.
H.L.: Are we at the beginning of a new bull market, or will the stock market get walloped with a correction?
L.A.: We’re up 50 percent, and some people still think it’s a bear trap, but that position is becoming more and more untenable. I’m not saying that solely based on the fact that the market has risen 50 percent, but rather that ECRI’s whole array of leading indices are rising relentlessly. At some point people will have to consider that we are in a new bull market. I don’t know when, but that’s for the market consensus to decide.
H.L.: Is the path of the economy and the business cycle going to be in the shape of a V, a W, or an L, an L being a descent and then consistent muddling along with no growth?
L.A.: I can rule out an L-shaped recovery. I can also rule out a double dip into negative growth toward year-end. My best guess is that instead of the often-hoped-for capital-V-shaped recovery, we get a small-v-shaped recovery.
