December 22, 2009
Lakshman Achuthan is the managing director of the Economic Cycle Research Institute and managing editor of ECRI’s forecasting publications. ECRI is an independent institute dedicated to economic cycle research in the tradition established by its founder, Geoffrey H. Moore, whom The Wall Street Journal called "the father of leading indicators." ECRI’s clients include buy- and sell-side investment firms and Fortune 500 companies. His most recent book, Beating the Business Cycle, is available from the link below.
We spoke with Achuthan on December 16.
In your book, you make the point that every recession and every recovery is unique. What was unique about this recession? Specifically, do you believe the degree of deleveraging contributed to the uniqueness, insofar as it created a self-reinforcing relationship between foreclosures and unemployment?
Certainly the home-price downturn was at the epicenter of this recession and crisis. But it’s really the way that the excess is manifest in each cycle that makes things different. In the last recession, in 2001, we had a lot of excesses, for example in information technology, that were unsustainable. In the run-up to 2007, we had a belief that home prices would never go down and the idea that exotic derivatives were a very efficient way to manage risk. Both of those assumptions came crashing down in this cycle.
As you point out, there is a lot of deleveraging in the private sector that happens in every recession, and in this one there was quite a bit that had to occur because housing tends to be the biggest debt-fueled investment that households take. There’s a lot that got leveraged up and therefore a very long way to go. That doesn’t end when the recession ends; it can continue into the recovery.
While there are common aspects to every recession, the locations of excesses or the stories behind each recession change from time to time. Pre-World War II, we have had a number of cycles in which a lot of deleveraging had to occur and in which there were financial crises. When you get these big credit-induced turning points, they are not smooth or mellow. They tend to be a little bigger.
Have the excesses been sufficiently worked off to say that we are in a recovery? What will be unique about this recovery?
We can say that we are in a recovery. However, some of the excesses are still being worked off and may limit what would otherwise be a stronger recovery. In April of 2009, our forecast was that the recession would end in the summer. Today, that forecast looks to be accurate. GDP for the second half of 2009 will run around 3%, although the numbers are still settling. It also looks like we will have headline jobs growth likely to start in the next few months.On these two counts – GDP as one big measure of economic growth and jobs starting to be added instead of being lost each month – this recovery is starting out stronger than the last two. That may sound – and it does sound – like a very bold statement. But it really isn’t, because the last two recoveries were pretty anemic.
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