Recession On the Way? It's Buffett vs. ECRI and the Markets

Late last week, respected business cycle research firm, the Economic Cycle Research Institute’s leading index growth indicator reported that the United States’ economic slid to -7.2% for the week, thus continuing the trend of the economic indicator’s decline since May. Accordingly, ECRI sounded alarms to clients Sept. 30 with the gloomily titled: “U.S. Economy Tipping into Recession,” issuing a call to action as the nation seems on the cusp of a full-fledged recession once again.

“This is a new recession; not a double dip… We are seeing weakness spread widely,” co-founder of ECRI, Lakshman Achuthan asserted.

The report is based on a number of specialized indexes. In 2010, amid double dip rumors and chaos, ECRI unequivocally ruled out recession based on similar statistics.

Today, the indexes are collectively demonstrating full-blown recession behaviors and indicators, not to be confused with “soft landings,” frequently predicted.

Now, “there’s a contagion like a wildfire among the forward-looking indicators that’s not going to be snuffed out,” Achuthan said. “The nature of a recession is not a statistic. It’s a vicious feedback loop. Sales fall production falls, income falls and that depresses sales. We’re in that and it’s going to run its course.”

It is significant to mention and understand that recession is not synonymous with a flat or downturned economy. If that were the case, we’d have been a recession for several years straight at this point. Instead it indicates that the economy is contracting, locked into the cycle.

In addition, the federal budget deficit, already over a trillion dollars is expected to skyrocket.

So why take such an omen seriously?

The firm has accurately predicted the previous three recessions and the 2009 rebound. Not to suggest that they can precisely predict the apocalypse to the exact date and time, but it is worth mentioning they know their stuff.

The ECRI also added that the expansion details, including length and intended progress are hardly, if at all, influenced by policymakers and the implementation of their initiatives.

“At least in the 1970s, the pace of U.S. growth, especially in GDP and jobs- had been stair-stepping down in successive economic expansions.”

And what’s worse? Indicators illustrate that such downturns may become more commonplace in the foreseeable future.

“We are in an era of more frequent recession,” Achuthan stated.

He referenced the 80s and 90s as “relics of the past,” in which investors relished extended periods of predictable market patterns and as a result enjoyed plentiful success.

A new recession isn’t simply a statistical occasion to mark on your calendars every X number of years or decades. Rather, the cycle, once launched, must run its course.

So this begs the question, how did this cycle come around again so quickly, and where was the reciprocal economic expansion we were all looking forward to?

Over three years ago, prior to the Lehman Brothers meltdown, economic experts were already warning slowed pattern of growth. Months before the last recession completed the era of persistent economic expansion and the expected business cycle between 1985 and 2007 was now history. The coupling of higher cyclical volatility along with lower trend growth is the primary reason we have now entered an era of more frequent recessions.

Therefore, this most recent prediction comes as no surprise. In fact, short expansions were, from 1799 through 1929 the rule, rather than the exception, lasting three years or less.

However, ECRI’s call is not the only indication that a recession may be starting. As Randall Forsyth wrote in Barron’s over the weekend, “The credit markets think the U.S. economy is headed back into recession. So does the copper market. And they're backed up by the indicator that's called the last three recessions.”

That one indicator, Forsyth says, is the action in the bond market as both Treasury and high yield markets are now at levels traditionally associated with economic difficulty.

Then there are the commodities markets, which up until just recently had been on quite a run. But with a slowdown occurring on a global scale with China leading the charge toward a hard landing, everything from coal to copper to even coffee have taken a beating lately.

Investors would be wise to prepare for more frequent shakeups and volatility, requiring an adjustment in trading techniques and contingency plans in times of fragile recoveries.

Essentially, the 2011 U.S. Cyclical Outlook attempts to clarify that if individuals are unhappy with the current economy, they best prepare to be rocked by the sharp downturn on the horizon.

One investor in particular disagrees with all of the talk about recession. Yes, the Oracle of Omaha himself contends that there is not going to be a recession. Buffett told CNBC last week that he thinks "it's very, very unlikely we'll go back into a recession... We're coming out of a recession."

Buffett told the audience that Berkshire’s businesses are improving and that his company will invest $7 billion in plants and equipment (90% of which will be spent here at home in the U.S.) this year alone.

In looking at the stock market, one could argue that investors see a difficult time ahead. And if the economy does continue to struggle, economists, lawmakers and central bankers alike may find it challenging to identify a remedy.

 

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