- The economy has given recession warnings, which have only been wrong once in the past 120 years.
- Top economist Lakshman Achuthan said ECRI's leading economic index has started declining over the past year.
- He added that GDP growth and job markets are also weak in some areas, which could lead to difficulties for the United States.
Lakshman Achuthan, a top economist, said the U.S. economy is issuing typical recession warnings, but only once in the past 100 years has there been a false positive.
The business cycle expert and co-founder of the Economic Cycle Research Institute pointed to alarming signs of an economic downturn in the United States, with warning signs of recession emerging in multiple sectors of the economy.
ECRI's Leading Economic Index, an economic indicator with a near-perfect track record, started declining last year, Achuthan said on Wednesday's Rosenberg Research webcast.
The index's decline has begun to ease in recent months. Still, he noted that over the past 120 years, a decline in the index has always been accompanied by a recession, with the exception of the post-World War II index decline.
“This doesn't guarantee a recession, but it does show that there are many people who are vulnerable to shocks,” Achuthan warned. “In many cases, that really speaks to the fragility of the business cycle.”
The situation is exacerbated by other signs of an increasingly weaker US economy. GDP is expected to slow significantly in the first quarter, with the Atlanta Fed forecasting GDP growth of just 2.5% over the next three months. Meanwhile, the U.S. Coincidence Index, a growth measure that includes GDP, employment and retail sales data, has hovered near 0% for the past two years, down sharply from a peak of about 20% in 2021.
Employment conditions have also begun to deteriorate dramatically. Although job growth appears solid on the surface, the unemployment rate has steadily risen, hitting a two-year high in February.
Meanwhile, ECRI's Cyclical Working Conditions Index, a measure of the economy's “cyclical work impulses,” has fallen by nearly 50% over the past few years. The steep decline mirrors declines seen in 2001, 2008 and before the pandemic-era recession, according to ECRI's historical data.
The strength of employment appears to lie in the non-discretionary areas of the market. This usually happens before a recession, Achuthan said, as consumers prioritize needs over wants. According to ECRI data, employment growth in education and health increased by about 4% last year, while employment growth in all other sectors trended close to 0%.
“Without that, we probably would have gone into a recession,” Achusan said of non-discretionary employment growth.
These warning signs point to an economic “tug of war,” Achusan said, with U.S. growth between cyclical weakness and external support such as stimulus and labor hoarding during the pandemic. It is said that he goes back and forth. If that support wanes, “there could be some problems,” he warned.
Other economists are warning of a coming economic downturn, especially with the possibility that inflation will remain high and the Fed risks keeping interest rates high for an extended period of time. A recession is four times more likely than an expansion, leading to a recession with significant job losses by the end of the year, according to top economist David Rosenberg.
