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Why the NBER acted at 'warped speed' declaring recession: Economic Forecaster

The U.S. entered a recession in February, according to the National Bureau of Economic Research. Economic Cycle Research Institute Co-Founder Lakshman Achuthan joins Yahoo Finance’s On The Move panel to discuss.

Video Transcript

ADAM SHAPIRO: Want to talk about the economic news that caught everybody not by surprise, but the speed with which the NBER declared we had entered a recession, caught some people by surprise. Lakshman Achuthan is the Economic Cycle Research Institute co-founder, and he is joining us now to help us understand where we are in this cycle. And I just want to, you have a recent article in which you called this a nasty, short, bitter recession. The thing that it seems nobody can put their finger on, is how widespread this will be. What are you observing?

LAKSHMAN ACHUTHAN: Well, I'd say pretty widespread. And very, very deep, which makes it easier to pick the peak in the economic cycle. You're absolutely right the NBER acted with light speed here, warp speed in declaring the peak of the business cycle just four months after it actually happened. We saw that pretty much back in April, we could kind of see that, which is what we said. Short, nasty and bitter recession.

The reason it's short, and I think this actually compelled the NBER to move fast, is because it's a, the recession's probably going to be over this summer. Now before everybody takes my head off on that, right, it's technically, you begin a recovery when you start to lift of the bottom. And this was, you know, we shut the entire economy down. You have this massive collapse in jobs and production. And now as we restart, we're going to lift off of those lows. That is hardly to say that we will be recovered. To be recovered, it's going to take quite a long time.

JULIE HYMAN: Lakshman, it's Julie here. It's good to see you. I have to, I have to call out Adam here, because yesterday when we got that headline from the NBER, he said duh. I mean, you know, this just confirms something that we already kind of suspected, to your point. This is something that you were watching. So I just wanted to get you to sort of remind folks why it's important to draw these lines, to demarcate when a recession begins, when it ends, and kind of what that does for us not just in economic research terms, but also in real world terms.

LAKSHMAN ACHUTHAN: Well, look, first, I think let's just reality-based what happened. This is a recession, right? Because there's all kinds of opinions about what's going on, and you guys know that better than most. When output and employment levels fall, OK, negative growth, and here it's very obvious to see, that is a recession that really impacts the economy outside your window. The economy inside your house. I mean, everybody is feeling this. That's why it seems kind of silly in a way. The NBER said there's a recession, everybody says duh, I knew that.

Now it also becomes very important for decision makers. You're doing it in your house. You know, what am I doing with my job, with my home, with my spending? Businesses also are trying to figure out, do I have faith that this isn't just some dead cat bounce or is it something more. And that's where these demarcations, recession and recovery, become very, very important. There's going to be a huge debate. The market's having a debate, is this a recovery or not. What is this? Is it just the Fed? Is it something else? Or is this something we can actually believe in?

When we look at the drivers of the business cycle in the leading indexes, good leading indexes, they're not all created equal by the way, but in good leading indexes, we see if there's traction being gained. And it does look like this is a viable recovery, at least for a few quarters. The reason I hesitate, is because we may not have been decided yet. It's very difficult to forecast these things.

And when I look at recent history, just the last two recoveries, we see a tale of two completely different kind of cities or recoveries. The '09-'10 recovery was able to really persist. It kind of built on itself. And when we look at the '01 into '03, those few years of recovery, what we saw was a false start. And a recovery both in the economy and in the markets faltered, because there was a renewed deceleration. Not another recession, but just like a slowdown, not this full on acceleration. And that really put things on pause and made that recovery quite weak in the beginning.

And here, I actually don't know which one of those tracks we're following.


ADAM SHAPIRO: Let me ask you, would it matter, and how would it play if we actually were starting to slow down before the pandemic became the headline? Is that something we have to measure?

LAKSHMAN ACHUTHAN: Well, you know, by some measures, we were, OK? We certainly were slowing down. And what we were hoping for, is that that was drawing to a close. But the pandemic hit. And it just overwhelmed everything. I mean, even I think if the economy had been doing a little bit better before the shutdown began, it still would have been a recession. I don't think you could have avoided this recession.

But unlike causing a recession, where you turn the economy off. Hey, everybody stay home, close all the doors, we're not growing here, it's very different to turn on an economy. Just to say, OK, lights on, everybody go back, it's all good. And you could see both when you look around and in your own personal activities, some hesitation in that. And I think that will be reflected, and that's what we have to watch in these forward looking indicators. The market is very hopeful that it's an '09-'10 scenario. I don't have the hard evidence to back that up just yet, but at least so far, we do have I think, a real recovery beginning this summer.

BRIAN CHEUNG: Lakshman, it's Brian Cheung here. And you bring up a good point about, you know, you can't just turn the economy back on. But then there's also the difficulty in that it's not necessarily binary that it's good to turn the economy back on right now, because there's a virus out there, right? So when we talk about even the interpretation of for example, lagging data, that's a problem with the employment report, right?

In many cases, you could argue that obviously while it's terrible to have people out of these jobs, we need to think about whether or not it's a good thing to be seeing an influx of people going back to those jobs if they might be at higher risk of them getting a second infection or maybe risking another outburst of the virus. So I guess when we're looking at, for example, on the other side of things, leading indicators, how does that create noise in interpreting these types of things, and how should people be watching the recovery indicators as we as we reopen parts of our economy?

LAKSHMAN ACHUTHAN: Yeah, that is the question. Right now, you know, it's hard to, I'm going to put words in the market's mouth. They don't really care about the virus, right? They're like, OK it's a recovery, the Fed's got our back, we're good. That's roughly the interpretation, and I don't think it's much more complicated than that. Later on, I think what you're bringing up is going to probably come back into the discussion.

And it'll be very interesting to see how that presents itself in leading indexes, in the leading indicators, right? The whole concept of a leading indicator is that you are not looking at just one section of the economy, but rather a broad swath. Hey, what's going on in the financial markets, the jobs markets, confidence, housing, all of these different things together, and collectively, are they still marching forward?

So far, so good. I think this, at the end of this week and next week, we'll actually start to see if there's any impact from the protests in the weekly leading indicators, for example. These are all things that are going to go into the mix. But just by virtue of the fact that we reopen some businesses and some people, not as many as lost their jobs, but a few people went back, relatively speaking, went back to work, the recession will technically end this summer.

ADAM SHAPIRO: Lakshman, it's always good to see you. I miss running into you on the subway, and look forward to a return to normalcy. All the best to you, sir.

LAKSHMAN ACHUTHAN: To be continued. Thank you.