ECRI sticks to US recession call

The CNBC folk gave the ECRI chief, Lakshman Achuthan, a pretty serious grilling last night. I can’t say he held up that well. Not because he lost any argument but because there wasn’t one. The ECRI methodology is a black box. As I’ve said many times, I’m quite suspicious of “Leading Indexes” in general, at least the ones I know of, because there appears to be nothing leading about them. I still think the ECRI will probably be proved right about a US recession next year on US fiscal cuts and European contagion but it would be nice to understand their confidence a little better.

David Llewellyn-Smith
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  1. The most appalling aspect of almost all analysis on “the US Economy”, is and has been for a long time, the failure to recognise that the USA is turning into a disparate collection of economies bound together in a political and monetary union akin to the EU.

    The most serious disparity is that of land use policy. California is in the same basket as Ireland, Spain and the UK.

    Texas and the southern and some of the heartland States, are akin to the German “engine” of the EU economy. Only I rate this “engine” as MORE resilient than the German one.

    If California was either ditched from the Union or made to abandon its ridiculous anti-growth policies, the USA would power off into the distance economically, compared to the rest of the world.

    Notice the effects on economies with NO urban growth constraints, of ultra-low central bank interest rates. While California remains mired in stagnation, the Texans are flat out building houses at immovably affordable prices and welcoming new workers and businesses en mass. Imagine what the combination of ridiculously low interest rates AND affordable land is doing to their economy. Imagine what it is doing to the cost of living and discretionary spending.

    Texas is “ground zero” for the future of Western Civilisation. The pro-growth, pro-business, small-government States of the USA are the ONLY part of the world today worth moving to, investing in, or starting a business in. So much for “the failure of capitalism”.

    • I read something a few months ago showing the “current account” positions of the US states over the years (from memory I think some of the numbers had to be guestimated) but the point the author was making (sorry do not have a link handy) was that imbalances between US states have been around forever.

      What separates the US and its states from the EU and its countries is that the US has both fiscal and monetary union. The EU just has monetary union.

    • Yes, my understanding is that the pro mining/drilling states like Texas are powering ahead. Pro mining seems to go with easy planning laws. There has been a quantum leap in drilling technology that has not hit us yet. The US now has so much natural gas it is dirt cheap there. Same is beginning to happen with oil.

      The US is rather Dickensian it seems to me – the worst of states and the best of states.

    • If Texas is ground zero for Western Civilisation, be afraid. The policies which underlie all the pro- you’re talking about there are systematically destroying the middle classes with low barely-regulated wage and relying on cheap imported labour while political grandstanding claims the opposite.

      California for that matter might be stagnating overall, but if you took Northern California and the Silicon Valley away from the US I think you’d be hard pressed to demonstrate where the next innovations would come from in the post-industrial economy of the US.

      • An absolutely “must read” on this very subject, for anyone who has not read it: a hard-hitting open letter from successful Silicon Valley entrepreneur T. J. Rodgers arguing that California has now destroyed the conditions under which Silicon Valley was able to begin, especially low cost land and small business premises.

        I quote, from the second to last paragraph:
        “…..our days of investing in California were over. We would never subject ourselves or our shareholders again to public insults by an anti-business politician over a destructive tax that never should have been passed. We have invested nothing more in our San Jose fab and will soon sell it, to complete the move of the very last of our manufacturing facilities out of the state of California. With only a few exceptions, the silicon has indeed been forced out of Silicon Valley…..”

        http://www.fcpp. org/images/ publications/ Cyprus%20letter. pdf

      • Seriously, you think what California is doing is NOT “destroying the middle class”? Median multiple house prices between 5 and 10, compared to between 2.5 and 3.0? (in Texas).
        And how can Texas have such low cost land and such low barriers to starting a business and putting entrepreneurial ideas into action; and you claim they are “DESTROYING the middle class”?

        Check out:

        Especially note “discretionary spending”, and the difference between high land cost cities like LA, and low land cost cities like Houston.

        • Notice especially the role of house prices in the “Wealth Gap”:

          Guess what? “Rising Inequality” is most of all a factor of AGE GROUP. After you’ve read THAT article, read “The Housing Bubble and the Boomer Generation” by Robert Bruegmann, to find out the number one reason for a wealth transfer from young to old.

          “….Starting in the 1970s, though, particularly in some of the most desirable markets in the country, the same people who most benefited from the developments of the early postwar years turned against those development practices. They advocated regulations for many things that most people, then as now, would agree were desirable – conserving scenic areas and wetlands, protecting coastlines and animal habitats and preserving open space, historic buildings and neighborhood character.

          Yet the net effect of all of these regulations was to limit severely the supply of land for urban uses. Even more important, existing homeowners, what I have elsewhere called the “Incumbents’ Club,” created a political system that allowed them to dictate how much growth and what kind of growth would be permitted in their cities…..

          “……..These land use regulations and real estate tax policies have made possible, at least in certain highly regulated markets, one of the greatest transfers of wealth in American history. The primary beneficiaries have been existing landowners including a very large percentage of affluent boomers. The ones who have paid have been less affluent renters, younger people and all future generations of prospective homeowners.

          The existing homeowner in the Bay Area could watch the value of his house soar from a few hundred thousand dollars up into the millions without lifting a finger. Meanwhile the dramatic rise in land prices, because it has not been accompanied by a corresponding increase in salaries, has devastated the prospects of young couples, many of whom were forced to either leave the area or obliged to take on huge mortgage debt just to afford an entry level house. These same people are now bearing the brunt of the steep decline in housing prices and the wave of foreclosures washing over the country.

          One of the most remarkable things about this enormous transfer of wealth has been how little most people were aware that it was happening or what caused it. A few people – notably Bernard J. Frieden in his book The Environmental Hustle from 1979 – had sounded the alarm. More recently Wendell Cox and Hugh Pavletich at have made a similar case using substantial data from cities in the English speaking world…….”

  2. ECRI may be a black box and therefore stands on their track record alone.

    However John Hussman is a bit more open about the indicators he uses and his latest weekly post mentions several of his indicators that he uses and shows his graph of those indicators against previous recessions.

    John’s market performance track record is great during 6/2006 to 6/2009 but he then got caught out by not riding the market back up. He was caught out by the paradigm shift in global government bail outs, stimulus, and quantitative easing.

    That said his analysis is always very interesting and worth careful consideration and he also supports the prediction of a future recession, although I feel he had more wiggle room this week than in some recent past weeks.

    Personally, I think that in the US you need to watch employment and inventory. Unemployment is, while a social and human disaster, almost irrelevant to growth and profits.

    It is whether employment and utilization are rising and inventory levels growing in absolute numbers on a seasonally adjusted basis that will be better indicators of any recession.

    When forward orders fall, inventory blows out and layoffs start that recession follows.

    Widespread big layoffs destroy the feeling of security for all workers and lead to a fall in discretionary spending.

  3. I think there is more to the business cycle than inventories and manufacturing orders. Manufacturing is a relatively small component of total US GDP these days. I think there are some very large-scale drivers, including rates of change in public sector outlays and the direction and rate of change in real per capita household disposable incomes. These factors determine the dimensions and trajectory of future final demand, so that if they move into secular decline, as they have been throughout 2011, then declines in final sales start to feed back into hours worked, hourly wages, employment levels, prices, profits, inventories, production…and so on.

    In the US, you can see consumers trying to adjust to weakening incomes by running down savings, and businesses trying to adjust by investing in labour-saving technologies, curbing orders (especially noticeable in import volumes) and clipping inventories. But these adaptive measures cannot compensate for declining real incomes for long.

    Income erosion, degraded savings and debt-super-saturation, tight consumer and housing credit conditions all erode household demand in a kind of inexorable squeeze.

    The US has not experienced a strong expansion from 2008/9, and is unlikely to dive steeply into recession – especially since the Fed has been trying to reflate, rather than the reverse, which is what usually triggers US downturns.

    However, in an economy as large as the US, there is a lot of inertia. It is hard to energize an expansion, and it is hard to arrest a decline. What we are likely to see is a prolonged and irresistible demand crush.

    In the past, the housing and auto sectors have frequently been starter-motors, kicking employment and demand into forward gear and animating cyclical expansion in employment and new spending. Business investment has accentuated expansion, adding to income growth and job creation – all a virtuous cycle of demand expansion. At the same time, improving prices and profits improve business balance sheets, and this stimulates new lending, further lifting employment and incomes.

    But these factors have been largely or even mostly absent in this cycle. Housing remains in a contraction, and while auto demand has improved, it has not re-surged strongly. This suggests there should be pent up demand in the household sector, and maybe there is, but income growth has been ebbing away. The result is these catalysts are not able to generate strong new employment and consumption impulses.

    So it seems like a slow-motion descent awaits the US economy….but we will see. Maybe something will happen to propel demand to an “escape velocity”, and lively expansion will resume.