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U.S. Economy Softening, No Recession Yet


- All U.S sectors slowing, manufacturing the worst.

- All countries’ export growth near zero, with alarming deflation.

- Fed unlikely to raise rates until economy accelerates.

Harlan Levy: What's your overall view of the U.S. economy from the latest data?

Lakshman Achuthan: Since early this year, we've been looking for a cyclical downturn in the growth of the U.S. economy. With some ups and downs, that's generally what's been happening.

If you look back in the rear view mirror, you'll see overall growth has been slowing. You see that looking at the jobs data we're gaining jobs but at a slower rate. The latest data on year-over-year payroll growth is at a 13-month low. That's a headline number you see in the jobs report. When you look again in the rear view mirror, you see the high point in the growth rate was in February. That's one way of taking the temperature of the economy.

You can look at industrial production. That slowed a lot more than job growth. That's down to a six-year low. You could look at Gross Domestic Product. That's at a half a year low in the growth rate. The consumer data is consistent with that. The income data is consistent with that.

The good news is we're still growing, but the surprise for a lot of people in the last month or so is that the slowdown has been happening. People don't realize it was happening all year until just a few weeks ago.

Q: With that backdrop, will the Federal Reserve raise interest rates sooner… or later?

A: If you're staying big-picture, generally if a central bank is going to raise interest rates it's typically done when the economy is accelerating. That whole debate - is the Fed going to raise rates? - has been in the headlines for several months if not longer. It would be pretty unusual for them to do it with the economy slowing.

Q: So what's your outlook on the economy going forward?

A.: The same. The leading indicators, the ECRI Weekly Leading Index, which goes back to the 1980s on a real-time basis, anticipated the slowdown and continues to point to more softening. The likelihood of some acceleration in growth happening around the rest of this year and into early next year is pretty low. We're probably going to keep feeling the way we're feeling or a little slower.

Q: How extensive is the global slowdown?

A.: We've been talking about this all year. It's not new. At the beginning of the year, we did point out that global trade and global inflation were all near zero. We also pointed out that exports all around the world, not just from commodity producers, but all of the exports for all of the countries the growth there is near zero, and that is a bit more alarming, because it's happening while export prices are falling. There's deflation in export prices, and even with everything being on sale, so to speak, the volume of growth is around zero for all exports. Even when you take out energy, you still see that happening.

For example, the U.S. is not really an exporter of energy, but our export growth of other things has fallen. It's not new. Very weak export growth has been happening for several years, depending on the country, from 2011 or 2012 onwards.

The global economy is slowing. There are two 800-pound gorillas in the world, the U.S. and China, and both economies are slowing down and have been all year, and the slowdown in both economies is going to continue.

That makes it very tough for the world economy to do something different. That's the big backdrop, and everyone is trying to position themselves within that. But there's not that much wiggle room. We're all along for the ride at this point.

Q: So what do we do with our money, our investments?

A: We don't make market calls, but I would say in any decision you make, whether it's where you invest your money or a life decision about a home or a job or a big purchase, the likelihood of the economy accelerating in the near term through the beginning of next year is low.

The likelihood of strong inflation is also pretty low, so prices aren't likely to skyrocket near term. If you're a speculator there may be things to speculate on. But you have to take all this under consideration when you do that.

Q: So when might things change?

A. I suspect 2016 will find some cycles turning back up, but there's nothing that I can point to in the short-term leading indicators that foresees an upturn today.

Around mid-year or the second half of next year, things may start to bottom, but we don't see anything yet. Let's check in with the leading indicators in a couple of months to see if anything has turned up. If the index turns up for a while, then we can talk about reaccelerating in 2016.

Q: The price of oil jumped to more than $50 recently. But I bet you don't expect oil and other commodity prices to rise.

A: You have the global slowing, which is the demand side, and you also have the supply side, and there's a lot of oversupply, because of the big buildup in capacity in China and elsewhere with all of the stimulus that followed the last financial crisis.

At some point that will shake out and commodities will bottom, and the market will clear. It's just hard to say when.

Q: What do you think of stocks?

A.: There's clearly a tug of war between the economic fundamentals and central bank policy. This is no revelation, but it seems to be giving us more volatility than we've seen in recent years.

It's hard to know why the market does what it does, but the nearby story is that the Federal Reserve has become a little more dovish as they've seen economic slowing, and that's good for stocks. For the time being, bad news is good news, but that can change without further notice, which is why we have volatility.

Q: Do you see much job growth?

A.: Job growth is slowing, while there's a disproportionate amount of job growth in lower paying jobs. For example, if you don't have a high school diploma, the job growth is pretty good. If you've graduated college, the jobs growth is not as good.

Another example of what's going on is the purple squirrel story. What happens is that employers are looking for the perfect candidate who will work for peanuts. That's the purple squirrel that doesn't really exist.

On the surface, you have a lower unemployment rate, 5 percent. On the other hand, the reason that number can be so low is because a record number of people have left the job force. It's a misleading indicator of job health. The labor participation rate is quite low, and wage growth is pretty flat. These are indications that the job market is not at all near full employment or healthy, as the jobless rate suggests.

Q: How weak is manufacturing?

A. It's quite weak, and the jobs growth there is nonexistent. Our exports are not doing well. The stronger dollar doesn't help that sector. All of the sectors are slowing, including services and construction, and manufacturing is probably the weakest.

Q: Are you at all hopeful? Are you full of despair?

A: No. The silver lining is that there's no recession yet. There will always be another recession, and I do worry about that. With interest rates at zero, there are limited options to stimulate the economy, but for the time being, we're talking about slowing not an outright recession.

Will it happen soon? I don't see it yet, but stay tuned. If there's going to be a reacceleration or a sharper slowdown, that's something we have to watch the leading indicators for.


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