ECRI's Lakshman Achuthan: Our Long-Leading Index Has Turned Down

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by: Financial Sense

By FS Staff

The following is a summary of our recent FS Insider podcast, "ECRI Forecasting Global Economic Slowdown for 2018," which can be accessed on our site here on iTunes here.

When we last spoke to Lakshman Achuthan, co-founder of the Economic Cycle Research Institute (ECRI), early 2017, he told us their long leading index had turned up, indicating a sustained global expansion was underway.

His call was correct, and 2017 turned out to be one of the strongest synchronized upturns in many years with global markets also seeing record returns in response.

Lakshman Achuthan spoke with FS Insider again this year to get an update on their outlook and the message they are giving now is quite different. Here's a short clip of what he told listeners...

Leading Indicators Turning Down

One of the benefits of leading indicators is that they don't get too caught up in today's headlines, Achuthan noted. Right now, ECRI's leading indicators are pointing down, both for the United States and for the global economy.

"The growth rates of our long leading indicators have turned down," he said. "That tells us that the synchronized global growth upturn that we've all been enjoying last year is drawing to a close and in fact may already be over."

ECRI's approach is to look at a large array of leading indexes, with each leading index a composite of a handful of good leading indicators of the current cycle. Their long leading index provides a three to four quarters lead, on average, at turning points, he noted.

Investment Takeaways

ECRI doesn't give exact targets on the stock market or economic releases, instead focusing on directional calls. These calls are most interesting when they diverge from the consensus, Achuthan noted, which he believes is what we're seeing now.

"The consensus is going to extrapolate some kind of the momentum from last year into 2018, and on top of that you have the tax cuts," he said. So it has to be pretty good. … We don't have a recession forecast here. We have a growth rate cycle downturn, a deceleration in growth."

Though it's not a hard science, he anticipates roughly a 2 percent slowdown, which is not necessarily recessionary unless something else deteriorates in the leading indicators.

Last year, we had inflation cycle upturns still intact and a growth rate cycle upturn that was the best for the global outlook since 2010. If they want to raise rates a quarter point or so here and there in that environment, it's no big deal. But if we have a growth rate cycle downturn taking hold and an inflation cycle, at least in the US, not running away, it's a little bit of a different story to be raising rates. We'll have to see how that evolves."