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Calling Recession & Recovery


KATHLEEN: UP NEXT, WE'LL TALK WITH LAKSHMAN ACHUTHAN, MANAGING DIRECTOR AT THE ECONOMIC CYCLE RESEARCH INSTITUTE. HIS FIRM CALLED THE BEGINNING OF THE RECESSION WHEN OTHERS WERE QUITE UNSURE. CAN THEY TELL US WHEN THE RECOVERY WILL GET UNDERWAY WITH SIMILAR ACCURACY?

KATHLEEN: OUR NEXT GUEST SAYS THAT WHEN TRYING TO GAUGE THE HOW AND WHEN OF AN ECONOMIC RECOVERY, NOT ALL DATA IS CREATED EQUAL. HE IS LAKSHMAN ACHUTHAN, MANAGING DIRECTOR AT THE ECONOMIC CYCLE RESEARCH INSTITUTE. WE HAVE A FULL PLATE COMING OUR WAY THIS WEEK AND A LOT OF PEOPLE OUT FRONT SAYING I'M FOCUSED ON THIS, FOCUSED ON THAT, AND THE BIG ONE SEEMS TO BE RETAIL SALES FOR MOST OF THE ECONOMISTS I'VE TALKED TO. YOU AREN'T ALL THAT IMPRESSED WITH RETAIL SALES AS A STAND-ALONE INDICATOR?

LAKSHMAN: ANY INDICATOR WILL FAIL AS A STAND-ALONE INDICATOR, BUT FOR GAUGING WHERE THE ECONOMY IS HEADED IN THE FUTURE, RETAIL SALES WON'T TELL YOU TOO MUCH. IT'S WHAT WE CALL A COINCIDENT INDICATOR, TELLING US WHERE THE ECONOMY IS RIGHT NOW OR VERY RECENTLY, BUT DOESN'T ANTICIPATE WHERE THE ECONOMY IS HEADED VERY WELL. AND THAT IS WHAT WE LEARN WHEN WE STUDY CYCLES AND TRY TO FORECAST TURNING POINTS.

RIGHT NOW, WE'RE LOOKING FOR A RECOVERY, AN UPTURN, AN END TO THE RECESSION, THE DOWNTURN.

KATHLEEN: YOU GET REAL CREDIT BECAUSE YOU DID PREDICT WHEN WE WERE IN RECESSION LONG BEFORE OTHERS DID. SO THE DATA YOU ARE LOOKING AT AS BEING TELLING IS OF INTEREST.

LAKSHMAN: WE LOOK AT OUR LEADING INDEX OF EMPLOYMENT AND A LEADING INDEX OF THE ECONOMY.

KATHLEEN: YOU'RE LOOKING AT THE MOVING AVERAGE THERE, ARE YOU NOT?

LAKSHMAN: MOVING AVERAGE, FOUR-WEEK MOVING AVERAGE OF THAT SERIES. THAT IS AN IMPORTANT SERIES. IT TELLS US WHERE THE ECONOMY IS HEADING AT TURNING POINTS, IT'S VERY STRONG AT TURNING POINTS. THE COINCIDENT INDICATORS WHICH WILL GET A LOT OF ATTENTION ARE RETAIL SALES AND INDUSTRIAL PRODUCTION AND THOSE HELP DATE WHEN THE ECONOMY TURNS, BUT DON'T FORECAST VERY WELL.

KATHLEEN: I KNOW YOU'RE NOT IN THE BEST GUESS BUSINESS, BUT IF YOU HAD TO NAIL IT DOWN, WHERE ARE WE IN TERMS OF THE RECOVERY?

LAKSHMAN: WE'RE RIGHT THERE AT THE TURNING POINT, IT'S IN Q-1. AND WHEN WE DATE IT, WE WILL USE INDUSTRIAL PRODUCTION AND EMPLOYMENT THAT WILL COME OUT AT THE BEGINNING OF NEXT MONTH TO TELL US WHERE IT IS. HOPEFULLY IT'S IN JANUARY. MY GUESS IS IT'S INSIDE THE FIRST QUARTER WHEN THE DUST SETTLES BUT WE MAY HAVE TO WAIT A QUARTER BEFORE WE CAN SAY.

KATHELEEN: NOW TALK TO US ABOUT THE ENRON IMPACT. A LOT OF THAT IS SO EMOTIONALLY CHARGED, HOW DO YOU QUANTIFY THAT?

LAKSHMAN: WE LOOK AT IT FROM A COMPLETELY DIFFERENT PERSPECTIVE, AS USUAL. WE FIND A WINDOW OF VULNERABILITY AROUND RECESSIONS. WHEN THE LEADING INDICATORS ARE GOING DOWN, THE WINDOW OF VULNERABILITY OPENS. IF SHOCKS HAPPEN THEN, IT'S VERY DAMAGING.

RIGHT NOW, THE LEADING INDICATORS ARE RISING. THAT'S TELLING US THE WINDOW OF VULNERABILITY IS NOW CLOSING. AS LONG AS THIS DOES NOT BLOW UP FURTHER IN THE NEXT FEW WEEKS OR MONTH OR SO --

KATHLEEN: YOU MEAN OTHER COMPANIES IN THE SAME SITUATION?

LAKSHMAN: OTHER COMPANIES OR NO CONFIDENCE IN ACCOUNTING OR JAPAN OR SOME OTHER SHOCK DOES NOT OCCUR, IT'S UNLIKELY TO DO THAT MUCH DAMAGE AS THE RECOVERY GAINS HOLD BECAUSE THE WINDOW OF VULNERABILITY CLOSES SO WE CAN TAKE A SHOCK.

KATHLEEN: I BELIEVE YOU BECAUSE I BELIEVE YOU. BUT IT HAS A MYSTIC QUALITY BECAUSE OF THE WINDOW OF VULNERABILITY. TALK TO US ABOUT JAPAN. WE HEAR ABOUT THE JAPAN WHEN THE ECONOMIC FORUM GOES TO THE WALDORF DOWN THE STREET, BUT A LOT OF PEOPLE FEEL WE'RE INSULATED.

LAKSHMAN: WE'RE NOT INSULATED. JAPAN IS THE SECOND LARGEST ECONOMY IN THE WORLD WITH THE LARGEST BANKING SYSTEM IN THE WORLD AND THAT BANKING SYSTEM IS UNDER A GREAT DEAL OF PRESSURE BECAUSE THEIR RECESSION IS GETTING WORSE.

WE ALL KNOW IT'S BAD, BUT IT'S GETTING WORSE THAN BAD, PUTTING ADDITIONAL PRESSURE ON THOSE BANKS. THEY'RE NOT FULLY SOLVENT AND THERE ARE LEGISLATIVE DATES COMING UP TO PUT PRESSURE ON THAT SITUATION.

KATHLEEN: GOT TO LEAVE IT THERE. THERE IT IS. THIS IS LAKSHMAN ACHUTHAN, MANAGING DIRECTOR, ECONOMIC CYCLE RESEARCH INSTITUTE.
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