MacroVoices #388 Lakshman Achuthan: Recession Still On Deck
ECRI co-founder Lakshman Achuthan argues that the long-anticipated recession is likely already underway or imminent, though people typically don't recognize recessions in real-time due to data revisions. He maintains this is likely still a bear market rally in stocks, while warning of structural inflationary pressures from weak productivity growth, onshoring, and constrained labor supply.
Summary
In this interview, Lakshman Achuthan of ECRI reaffirms his recession call from over a year ago, explaining that recessions are typically recognized only in retrospect due to data revisions that occur well after economic turning points. He notes that during the Great Recession, people didn't realize they were in recession until July 2008, despite it having begun in December 2007. Achuthan argues the current environment shows classic recessionary patterns: cyclical indicators declining, consumer spending rising as a percentage of GDP while business investment falls, and service sector leading indicators plunging despite coincident data remaining positive due to 'YOLO summer' spending on travel and leisure. He characterizes the 19% stock market rally as potentially a record-breaking bear market rally, noting that such rallies are common during recessions. On inflation, Achuthan distinguishes between cyclical and secular trends, explaining that while cyclical inflation indicators are declining globally, structural factors suggest a potential return to 1970s-style inflation cycles. Key structural concerns include deteriorating productivity growth across manufacturing, services, and construction sectors, with construction productivity so poor that it now takes two workers to do what one did in the 1990s. Additionally, onshoring trends and severely constrained labor supply from COVID impacts, immigration restrictions, and early retirements create inflationary pressures. He emphasizes that even in a secular inflationary environment, recessions will temporarily suppress inflation cyclically, with the key test being whether inflation troughs at higher levels than previous cycles. The interview includes analysis of economic weakness in China's industrial sector, declining global manufacturing PMIs, and deteriorating cyclical labor conditions in the US despite headline job strength.
Key Insights
- Achuthan argues that recessions are typically not recognized in real-time because the economic indicators that define recessions undergo significant revisions well after turning points occur
- The current 19% stock market rally represents what may be a record-breaking bear market rally, though such large rallies during recessionary periods are not unprecedented given post-COVID extremes
- Classic recessionary patterns are emerging with consumer spending rising as a percentage of GDP while business investment collapses, which typically occurs at recession onset
- Service sector leading indicators are declining in a recessionary fashion despite coincident data staying positive due to discretionary spending on travel and leisure
- Productivity growth across manufacturing, services, and construction has deteriorated so badly that construction now requires two workers to accomplish what one did in the 1990s
- Structural inflation pressures are building from weak productivity growth, onshoring trends, and severely constrained labor supply from COVID impacts and demographic changes
- China's industrial sector leading indicators never gained traction despite reopening, suggesting the global manufacturing recovery narrative was premature
- The key test for secular inflation will be whether the next cyclical inflation trough occurs at higher levels than previous cycle lows, similar to 1970s patterns
- Cyclical labor conditions are deteriorating significantly despite headline job growth, with typical recessionary signals emerging in temporary employment and work week data
- Federal Reserve rate hikes implemented over the past year are now beginning to bite the real economy through long and variable transmission lags
- Global manufacturing PMIs show continued weakness despite brief hope at the beginning of 2023 from China's reopening
- Current economic conditions exhibit many post-COVID extremes and record-breaking charts that make this cycle particularly confusing and potentially longer to play out than typical cycles
Topics
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