To Lakshman Achuthan, the question isn’t whether the U.S. economy is sliding toward a new recession, but when one will start, if it hasn’t already.
The co-founder and chief operating officer of the Economic Cycle Research Institute called a recession “imminent” last September as ECRI’s leading indices dropped steadily. He repeated the warning in December, despite healthier-than-expected fourth quarter growth.
Now Achuthan is at it again, hitting cable television’s financial circuit to argue the modest three-year U.S. economic recovery will end by midyear.
“We’re continuing with that call. We’re in the midst of a global cyclical slowdown,” the economist told Tom Keane, host of Bloomberg TV’s Surveillance Midday, on May 9. “There’s been debate over whether the U.S. is part of that slowdown, and I think (the debate) is shifting toward our position.”
Achuthan bases his recession call in part on ECRI’s Weekly Leading Index, which dropped through much of May to 121.6 in the week ending June 1. That brought the WLI down 2 percent year-over-year. The index includes data from the Industrial Price Index produced by ECRI and The Journal of Commerce, which has declined relentlessly since last August.
The JOC-ECRI index, which tracks the prices of 18 commodities, was down 15.5 percent year-over-year on June 8, a signal of lower demand for those commodities and slower growth ahead. Although the rate of decline in the IPI rises and falls, it has remained firmly in negative territory for 44 weeks, hitting a low point on Dec. 23 when it was down 23.9 percent.
For Achuthan, another warning sign is the low level of growth in personal income. “For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last 10 recessions,” ECRI said in a statement in May. “Has personal income growth ever remained this low for three months without the economy going into recession? The answer is no.”
Renewed recession could devastate shippers and transportation suppliers, especially ocean shipping lines hoping to raise container rates and recover from more than $1 billion in collective losses in the first quarter alone. Surface transportation operators would be hit hard, too, especially those less-than-truckload and truckload carriers still suffering losses and hoping, like their ocean counterparts, to raise rates. Demand for intermodal service would weaken, and trucking capacity would shrink — though perhaps not as fast as demand — as vehicles and drivers are idled.
Achuthan is putting ECRI’s robust reputation as a forecaster on the line with his aggressive recession call. Other economists debate whether the U.S. is tipping into recession, or that a recession in the near term is inevitable. “That’s an interpretation I’m against,” said Mario O. Moreno, economist for The Journal of Commerce and its PIERS sister company.
Whether the U.S. economic recovery slogs through another soft patch or falls into a sinkhole depends on events overseas. The European debt crisis, above all, casts a pall around the globe. “Europe is already in contraction, but if Greece leaves the eurozone, things could get much worse, and that could potentially derail our economic recovery,” Moreno said. Europe’s troubles “are really driving global uncertainty” that makes it more difficult to forecast freight demand and volumes.
Some observers see a choppy cyclical growth pattern emerging instead of an unrelenting plunge. “It is nearly impossible to escape the conclusion that we are replaying in some manner the spring-summer slowdowns of the past two years,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said on June 6.
The news isn’t all grim. In its latest report on current economic conditions, commonly known as the Beige Book, the Federal Reserve reported overall economic activity expanded at “a moderate pace” in April and May, with manufacturing increasing in nine of the Federal Reserve’s 12 districts. Overall U.S. industrial production rose 1.1 percent in April, after falling 0.6 percent in March. Factory production growth in May decelerated but still increased, marking the 34th straight month for manufacturing expansion, according to the Institute of Supply Management.
However, factory orders for April fell again, and this time to the lowest level in six months, according to the Commerce Department.
There’s no doubt the pace of the economic recovery slowed early in 2012. In May, the U.S. Commerce Department revised first quarter GDP growth downward from 2.2 percent to 1.9 percent. Inventories increased in the first quarter by $57.7 billion, but contributed less to GDP growth, representing only 0.2 percentage points of the 1.9 percent increase. In the fourth quarter, inventory restocking contributed 1.8 percentage points to that 3 percent GDP growth rate.
Most significantly, hiring slowed. The U.S. added only 184,000 new jobs in the first two months of the second quarter, compared with 470,000 jobs in the first two months of the year. Unemployment seems stuck at about 8 percent. Private sector employment rose 1.78 percent year-over-year in May, compared with 2.09 percent in January.
“The May employment report brought to light what many of us didn’t want to accept: that the economy is slowing harshly,” Moreno said. “We need to keep creating jobs. Consumer spending can’t grow if there is no job growth.”
Shippers buffeted by economic uncertainty on a global scale are responding by keeping supply chains lean, especially as transportation operators prepare to raise rates. “Inventories are leaner than they’ve ever been,” Derek Leathers, president of $2 billion trucking operator Werner Enterprises, said at the ALK Transportation Technology Summit in Princeton, N.J., in May. Leathers urged his audience to remember the spring of 2010, when “a very minor pull forward of inventory out of China” led to a truck capacity crunch. “They brought less than 2 percent of their volume in early, and the network locked up. Freight didn’t move and rates spiked. That’s how lean we are.”
That means small fluctuations in demand on a regional or commodity basis could crack or snap less flexible supply chains like a bullwhip. “We’re right on the razor’s edge right now in terms of supply and demand,” Leathers said.
In the near term, can a recession be avoided? Moreno believes so. Unfortunately, the steps he sees as necessary won’t be easy or politically palatable.
First, the Federal Reserve could extend Operation Twist, a program launched last fall to “twist” down interest rates by selling short-term bonds and using the cash to buy longer-term bonds, increasing demand and lowering interest rates. The program is set to expire at the end of the month. “That will spur consumer spending on homes,” Moreno said. “We’ve had a bit of a rebound, a recovery in home sales, but it’s really very modest. That’s actually because of these low interest rates.”
His second prescription will be much harder to swallow: “What can really make a difference here is government spending. Temporarily, at least, it needs to increase,” Moreno said. “That could be passing a transportation bill, paving the roads, creating more schools, whatever. All the talk is about cutting the deficit, but government spending is the only way out, because the consumer is still in a deleveraging mode.”