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We’re headed for a recession — ‘just not yet,’ economic cycle expert says

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Lakshman Achuthan, Economic Cycle Research Institute Co-Founder, joins the Live show to discuss the odds of a recession occurring, the causes of a potential downturn, and the outlook for the economy.

Video Transcript

JULIE HYMAN: Lakshman Achuthan is with us now to talk more about all of this, Economic Cycle Research Institute co-founder.

LAKSHMAN ACHUTHAN: Hi.

JULIE HYMAN: So what you do is in the name of the organization. Economic cycles is where your expertise lies. So are we going into a recession? When is it happening? How should we be thinking about this, especially with the numbers this morning?

LAKSHMAN ACHUTHAN: Sure, well, I think these numbers reinforce our earlier outlook that odds are we are going to go into a recession. The question as to when is just not yet. But, I mean, it's super tantalizing. But it's there because of the kind of information that we're seeing today.

Right, the Fed is going to be super hawkish. I think we just concluded that, right, as a result of these continuing highs in inflation. So that makes for a really odd mix. You don't have to be an economist to figure this out, right?

The economy is slowing, consumer confidence at a record low. You don't to hear that. At the same time the Fed is stomping on the brakes. What's going to happen, right? The odds are you could slow too much.

And they really just have a choice of policy mistakes or errors. There's no right way out of this. We wrote back in January that because they were so late in going after inflation and slowing things down, they now are trying to make up for it or catch the train. But the inflation train left the station a long time ago. And we're seeing that built here.

So as a result, the US Fed, other central banks around the world, everybody's tapping on the brakes. We're all going to slow. And I we all know the odds are really high here of a recession.

BRIAN SOZZI: Mild recession or something bruising?

LAKSHMAN ACHUTHAN: First off, I just want to say it's super hard to predict a recession. I know a lot of people are predicting. I just got to tell you, it's super hard to do this. We have a pretty good record of doing it. And so I think it's meaningful that we're saying that there's a recession in front of us.

Now, as to mild or severe, a lot depends on the nearby shocks, right? By definition, you don't know what they are. We think we know what they are, right? Some pretty shocking things have happened. And they may persist to make a recession more severe.

On the other hand, you might say, well, some consumers have money saved up. Some businesses have decent balance sheets.

JULIE HYMAN: And most people have jobs.

LAKSHMAN ACHUTHAN: And most people, and most people have-- well, the job market's pretty tight, let's say. So therefore, this could mean a mild recession. I don't think that's knowable just yet.

One of the things that we're seeing from our research, because we do look at 22 economies around the world, is that there is a setup for a more severe recession, a more international recession. And the last time we had that would have been the early '80s, which is after the inflation of the '70s. So there you go.

- And so within that context, as we're thinking about where this leaves employees, but also consumers, because at the end of the day, those employees are daily basis consumers on everything from gas to food items. And they're looking across the board at where those price increases are being felt. So in the wake of or at least leading up to a recession, how they're feeling is going to be even more so priced into the markets well ahead of the actual recession showing up in the GDP print.

LAKSHMAN ACHUTHAN: Yeah, yeah, yeah, 100% right. And I'm glad you brought up, what do consumers do, right? First off, as you were saying, job market's hot. If you don't have your dream job, get your dream job. If you're in it, hang on to it. Just solidify yourself. It's a really good time to be doing that, number one.

Number two, save for a rainy day. If you can, start to sock away or beef up your savings a little bit because things are likely to get more volatile. A growth rate cycle slowdown, just a simple garden-variety slowdown, you can get 10%, 20% corrections in equities. A recession, you're more in bear market territory.

And when you go back to the consumers, let's oversimplify and say there's lower income as a half or more and then upper income to various stages is the other side. Lower income, very strapped already, right, because it's rent. It's food. It's energy. It's everything that you need takes up the whole budget.

Wealthier consumers may have some exposure to equities or home prices that have been rising. If those start to wobble, they get a little edgy and start to pull back. And you'll see it. Even though nominal numbers can look good, the company is going to come out and say, oh, look, nominally we did these blowout numbers.

Look at the actual amount of stuff, right? There's less chips in the bag even though the bag still costs 2 bucks. And people will start to move on discretionary things. You won't use a fresh can of tennis balls every game. You'll use them for a few games. That's the kind of stuff that starts to seep in.

JULIE HYMAN: You said a moment ago that the ingredients are in place to potentially have a worse global recession. What are those ingredients? Walk us through what would need to happen to get there.

LAKSHMAN ACHUTHAN: OK, so we enter this recessionary window of vulnerability, where I think we're edging toward that pretty clearly. Then you have shocks that are occurring inside the window of vulnerability. We already have the energy shock. If it persists, that verifies. That could be part of what makes the recession sharper.

You could have a market event. That's a type of shock. You could have a geopolitical event. Look at what's going on in Europe. I mean, I know it's slipped a little off of the major headlines, but that's still percolating.

Those kinds of impacts you see coming full circle and in today's report. Food is up. Energy is up. So these are the kinds of things-- and there's some interesting things happening with currencies and these central banks around the world. There's things that can move very fast.

In the summer of '08, August of '08, before Lehman blew up, our international indexes, leading indexes-- now I'm talking forward-looking, where's the puck headed-- those indicators went to recessionary readings. And then Lehman blew up. So that combo in retrospect was the recipe for the Great Recession. OK, we have to wait and see.

BRIAN SOZZI: If we get that recession, who bears the most blame for it? Is it Jerome Powell, the Fed, or the Biden administration?

LAKSHMAN ACHUTHAN: Oh yeah, so look, they both have their fingers near this, right? So you want to support the economy coming out of the pandemic and the deep COVID recession. There was a-- we called an inflation cycle upturn in September of 2020. That's 21 months ago. The Fed hung out with the transitory stuff, keeping that going all the way until November of last year. So that's very late.

And the same thing with the kind of fiscal response. There are things early on that were super helpful. I think people see that. But then more recent stimulus, you're pushing on the gas when the inflation cycle is already running up.

I think the fundamental issue, fundamental, from where I said I study cycles, is that I don't think economic policymakers understand that inflation is cyclical and that that's different than the business cycle. It's a fundamental concept. I think a lot of noneconomists can understand that. But actually, after you've become an expert in modeling, it's a little tougher.

BRIAN SOZZI: Well, on that happy note, let's get some shots. Let's get some shots and have a great weekend.

LAKSHMAN ACHUTHAN: No, no, no, no, no. OK, we've survived all of this stuff in the past. And we're going to survive it again. I have no doubt. And this will set us up for stronger growth. But unfortunately, some of the more vulnerable get hurt during a recession.

BRIAN SOZZI: I like leaving on that. Let's leave it on that note. Lakshman Achuthan, Economic Cycle Research Institute co-founder, good to see you. Appreciate you coming down.

LAKSHMAN ACHUTHAN: Thank you.