Recession? Yes. Depression? No.

Press of Atlantic City
November 23, 2008

(PAC) - When we talked with the Economic Cycle Research Institute in April, its Weekly Leading Index had just called the start of the recession.

Many in government and business disagreed then, but last week the 51 forecasters surveyed by the Federal Reserve Bank of Phila-
delphia were unanimous about a recession, and their consensus is that it began in April.

Now the Weekly Leading Index - which tracks drivers of the economy to forecast three to six months ahead - is at a reading of -28.2 percent, twice as negative as it was in April.

Time to panic?

Not according to Lakshman Achuthan, managing director of the ECRI.

He said Thursday that the index is intentionally hypersensitive to perform its primary function: signal a turning point, up or down.

Its continuing decline means there will be no recovery in the next half-year, and that this recession will be at least as severe as that in the 1970s, he said. It does not mean we're headed for a depression, a word being used carelessly by some.

"When we look at the leading index during the depression in the 1920s and the Great Depression in the 1930s, it was much, much worse, materially worse, much deeper and nothing like we've seen so far," Achuthan said.

What we are seeing now, he said, is the creative destruction that is the Darwinian aspect of the free market.

"It's survival of the fittest, which in this case means having a lot of cash, both for households and businesses," he said.

While it may be painful to see the job losses and weakness in markets during this phase, such destruction lowers prices and makes room for new businesses to start.

He offered the auto industry as an example.

"I'm not suggesting that we're going to lose the auto industry, but we're going to have, to put it nicely, a restructuring," Achuthan said.

"As that occurs, we'll have the opportunity for a new business model to emerge that works for the future, whereas the old business model can't work in the future."

Policymakers contemplating more rebate checks, infrastructure spending, tax cuts and giveaways to special interests need to realize there isn't much anyone can do to change the course of the recession at this point, he said.

"You can't influence the drivers of the cycle. Once the cycle has taken hold, you are along for the ride, even if you're the president, chairman of the Fed or head of the European Central Bank," he said.

Achuthan recalled that in April we had talked about how policymakers already had missed an opportunity to lessen the recession by speeding the first stimulus package to consumers before those economic drivers took control.

Now, he said, the best timing for the positive shock of another round of stimulus would be to get it ready but not apply it until the index signals a recovery is near. That would result in a very strong, V-shaped recovery, instead of a weak U-shaped one.

He compared the stimulus timing with pushing his daughter - born just ahead of the recession - on a swing.

"You don't push a swing at any time you want. To get the desired result, you have to be ready to push and then, just when it's at the right spot, you give it a push," Achuthan said.

There are things government can and should do now to keep the economy stable, he said, including:

extend unemployment insurance;

provide federal aid to state and local governments so they don't cut essential jobs such as police, fire personnel and teachers;

assist strategic industries - including automakers - to retain most jobs for now.

"Those are things they have to do now to reinforce the safety net and mitigate the ongoing recession," Achuthan said. "I don't expect any of that to generate a recovery."

Nor would reworking mortgages to avoid foreclosures, he said, since people without jobs cannot pay a mortgage no matter what the terms.

The recovery will come on its own, and it's likely many will doubt it at first, just as they doubted the recession early on, he said.

The first sign will be when the Weekly Leading Index becomes less negative, an important first step but not enough.

"We need to see a pronounced rise in the indicator. It has to persist for a couple of months, and finally it has to be pervasive," he said.

Then in three to six months, the recovery will follow - and we'll get to work starting the next economic cycle.