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Why we should expect a deceleration in the consumer sector recovery if stimulus stops or is reduced

Lakshman Achuthan, Economic Cycle Research Institute Co-Founder, joined The Final Round to discuss his outlook of the economy as stimulus talks remain at a standstill.

Video Transcript

SEANA SMITH: Well, for more on today's action, we want to bring in Lakshman Achuthan. He is the co-founder of the Economic Cycle Research Institute. And Lakshman, I mean, it's interesting-- I guess let's just first start with what Akiko was just talking about, and the fact that investors seem to be able to look beyond so much uncertainty out there in the market, specifically when it comes to the rising tension between the US and China relations. Why do you think that is? And is this something that you expect to continue here, at least in the short term?

LAKSHMAN ACHUTHAN: Yeah. The punch line is yes, I expect it to continue, the recovery to continue. We had thought that this could be a short recession. We're seeing the signs of activity picking up. There's kind of two pieces to it, oversimplifying, right?

There's the consumer, you know, what are people buying, and what are these earnings going to show? And I think we had a good coverage of that just a moment ago. And then there's the industrial side of the economy. And on the latter point, on that industrial side, we're smack in the middle of a global industrial growth upturn. And that is going to affect all kinds of different economies, and commodity prices, commodity price inflation, and sectors of the economy in different ways.

And I was just struck by, you know, we have the headline kind of jockeying on the US and China with banning different companies and whatnot, but underneath all of that, if you kind of think about it, the US consumer has certainly dialed back on consuming services. But on the other hand, all this DIY stuff, right, Home Depot and all these guys are going to say, hey, you know, people are building stuff at home, a lot of that is imported. And probably a good hunk of that comes from China.

So this-- this kind of goods industrial component-- like, people have shifted their consumption. You used to go out to eat all the time, or some people did. And then now they're like hey, let's build something at home, or let's do something at home, or I'm going to do these projects. And that's going to be showing up in the economic data, despite whatever the headlines are. And I think that that industrial sector upturn is actually underpinning the recovery that's likely to continue in coming months.

- Lakshman, I'm wondering, do you see the US as being the center of this industrial upturn that you're talking about? Or is it really happening faster in Europe, other overseas economy? And if so, how do investors actually play into that?

LAKSHMAN ACHUTHAN: Right. Well, I think it's everywhere. We're all-- you know, there's a global kind of industrial factory-- or factory floor. People-- different-- different economies are at different stages in there. The US certainly plays a huge role in global industrial growth, as does China, Europe, in particular Germany, and maybe France, and Italy. They have big industrial sectors in emerging markets, where you have a lot of commodities.

And so all of the different economies are going to be participating. Now, typically an economy is not 100% industrial, right. It's got its consumer component. So you might have two-speed economies, in many cases.

In terms of how you might play into this, you know, I know today the industrials gave back a little bit, just on the day trade. But in general, they've been kind of performing a little bit better in the markets. The other place that I find quite interesting is, you know, the run-up in gold prices is certainly impressive, but if you look at the industrial commodity price inflation underneath it, away from gold, not the precious stuff, but like copper or lumber, even, these kind of things are seeing price increases that are more than gold and are likely to continue. I don't see those ending anytime soon.

RICK NEWMAN: Hey, Lakshman, Rick Newman here. I feel like something's missing from the equation. So I mean, we've gone from about 6 million unemployed to something like 16 million unemployed, more then doubling, and consumer spending is 2/3 of the economy. So I mean, is there going to be a collapse in demand at some point, whether it's when the stimulus runs out or something else happens? Or I mean, what-- what is keeping this all kludged together?

LAKSHMAN ACHUTHAN: Well, you know, that's a fastball down the middle of the plate there. I mean, I think the huge stimulus helped that has kind of run its course, and we're all waiting with bated breath as to what's going to happen here. Because we also have had, just the same way we've had this recovery on the industrial side, the manufacturing side of the economy, we've also had it off of extremely low levels on the services side.

And on that score, it's largely supported by-- by stimulus and different types of support. And if that ends or is substantially reduced, you know, we should probably expect on the consumer side, the services side, some deceleration in the recovery that we've had over the last couple of months. And where it goes from there is a really big question, right?

So we're looking at leading indicators to try and answer that. Those are already pointing to some softening of the growth on the consumer side. And I think that's the key question, where does it go from there? Because if-- and this is speculation, but the way that the sequence work, if the consumer growth consumption slows a little bit, it actually boomerangs around the world and starts to depress global industrial growth.

So we'll have another slowing. So we're enjoying the flip side of the nasty part of the recession, so it kind of snaps back. But if we should have a slowdown in overall growth, we're going to get another slowdown in global industrial growth. That's why commodity traders live on the edge, right. It goes up. It goes down. It goes up. It goes down. We have to watch for that.

AKIKO FUJITA: So how much downside does that mean for the broader economy? And I guess the question of, in the context of the markets, how does that materialize in the markets? I mean, you've got those like Goldman Sachs have now come out and called for, you know, the S&P 500 to push even higher to 3,600 by the year-end. If there is no real stimulus bill intact, how much--


AKIKO FUJITA: --do we see-- how much drawback do we see?

LAKSHMAN ACHUTHAN: I mean, I think, you know, it is tricky, right. We have-- it's very real, the global industrial growth upturn. That is real. And so you will see that showing up in different company reports, depending on how they are connected to that.

If things start to slow, the markets are certainly looking to the government-- or the Fed or the-- the government reaction function to that. Because if things slow, you know, what else are we going to get? We could-- because it is pretty impressive, the types of stimulus that have gone out. Super interesting if you look at gold, right, because gold's not an industrial commodity. Gold is-- is maybe more interested in the amount of global accommodation, monetary accommodation, fiscal accommodation.

And it's kind of interesting. I don't think people really realize this, but in the last 20 years as inflation has been trending down, gold has been going up, accommodation has been going up. That's the opposite of the relationship in the last 20 years of the previous century. So there's a lot of massive undercurrents going on here.

I think a lot depends on this question we were-- Rick was just mentioning, hey, what if the consumer pulls back? The way that we'll answer that is leading indicators of the service sector. Those are still to the upside, but the growth is-- is something we want to keep an eye on here, and that may feed back to, where do we go with this alleged fiscal cliff? Is it going to happen or not? Or is it happening already?

SEANA SMITH: Yeah, something certainly continue to watch, because some of those econ data points that we have gotten on consumer spending has showed that we are seeing it slow a little bit. So I think August's reports will, of course, be in a-- I guess really in focus here for a lot of investors. Well, Lakshman Achuthan, a co-founder of the Economic Cycle Research Institute, always great to have you on the program. Thanks so much for joining us.