Recessions Differ from Mid-Cycle Slowdowns in that that are Self-Reinforcing.
A self-reinforcing downturn, which normally leads to a recession has begun, reports Lakshman Achuthan, managing director of Economic Cycle Research Institute (ECRI). Basically the self-reinforcing step by step downturn process is lower sales, followed by lower production, leading to higher unemployment, which means weaker income which feeds back to further lower sales and the cycle feeds on itself. As opposed to a mid-cycle slowdown which doesn’t self reinforce; a major, major difference. ECRI describes itself thusly: “ECRI monitors over 100 proprietary cyclical indexes for major economies covering more than 85%of world GDP. We regularly interpret these indexes to from a sophisticated cyclical forecast that is much more accurate than most people possibly believe.” ECRI has been pretty good in my experience. Anyway, Mr. Achuthan last Wednesday said the good news is that the current downturn has not yet gained the kind of momentum that would make it impossible to avert recession. Thus he has hopes that the just passed US government stimulus plan (for once, good going government!) may give the economy a shot in the arm just when its needed and thus avert the recession. Schwartz View: One other insightful observation by Mr. Achuthan. He says that the current downturns in both Europe and Japan are not being caused by a ripple effect from the US downturn, which would show up with a lag. Sounds ominous to me.