Mumbai: US third-quarter advance gross domestic product (GDP) growth numbers surprised most economists, coming in at 3.5%.
Lakshman Achuthan, managing director of the Economic Cycle Research Institute (ECRI), said in July that he saw the US recession ending in the third quarter. Having been proved right, he said the 3.5% growth was stronger than what had been seen in earlier recoveries. Achutan doesn’t see a renewed downturn over the next few quarters. Although he expects the employment scenario in the US to improve, driven by the services sector, he says the rise would be uneven. Edited excerpt of an interview:
What do you make of the advance GDP number that came out?
First and foremost, it’s a strong confirmation that the recession has ended this summer and that we are in the early stage of recovery... It’s not a forward-looking indicator, but it is important for those who have really doubted that the recession had ended... The other thing that is important about the figures is that when you look under the hood, you see that there is broad-based growth and it’s not simply growth that is tied to government spending.
Recovery signs: ECRI managing director Lakshman Achuthan.
Did you anticipate that it would be as strong as 3.5% growth?
First, in the spring, back in April, the first step was forecasting the end of recession—the fact that the economy would experience a turning point in the cycle. As the summer began to unfold, watching our forward-looking leading indicators, we began to suspect that this could be a stronger recovery than what most expected. And actually, even with the preliminary numbers 3.5%—that is a stronger first quarter of growth than that we have seen in the last two recoveries... So it’s a good start but it’s very important that in the next few months we begin to see some positives in job growth.
You have been quoted as saying that the risk of a double-dip recession is very low. Do you stand by that? What do you need to see for that to be proved right?
On the issue of double-dip recession, we do not see a real downturn in the next few quarters or maybe up to a year for the economy. We are going to see many quarters in a row of positive growth on GDP. As for jobs, I do expect that around the beginning of the new year, we will see positive headline job numbers. This will happen almost entirely on the back of the services sector of the US economy because the manufacturing sector has problems with employment that will not be cured by the end of this recession. So this is going to be somewhat an uneven jobs recovery and therefore not as strong as we would like, but it will show positive jobs growth that will help sustain the recovery.
There are two reasons I believe that is sustainable: one, the primary reason is based on our leading indicators which continue to remain very healthy, they are not showing any new downturn. But also looking inside the GDP numbers, looking around at the other numbers coming out that are telling us about the current economy, what you are finding is that there is strength in the economy away from stimulus. There is services spending, non-durable goods spending and decent exports—all show that this recovery is sustainable.
You are saying the recovery looks strong just for a year. Why just that period and what do you see happening thereafter?
We have tried for decades to forecast economic cycles better and farther ahead. And really, the best we have ever been able to do is maybe up to four quarters or a year and everything has to be right to be able to see that far ahead. Our belief is that it may just not be that knowable; it may not be decided what is going to happen with the economy beyond a year from now... The exit (from stimulus) strategy probably has a lot to do with how sustainable this recovery is. The last two recoveries saw monetary policy on hold for an extended period into the recovery. So if recent history—the last 20 years—is any guide, there is no rush.
I know there is a lot of concern about inflation because of all of the liquidity that has been added, not only by the US but by other major central banks around the world, and therefore the exit strategy timing, the fact that we are going to pull back liquidity is not at dispute—that is going to happen. But there is some eagerness to do it, maybe sooner than need be.
We are watching separate leading indicators of inflation which have not turned up in any scary way, which are telling us the time for an exit strategy is not yet. The longer one can hold off on an exit strategy, the more likely that this recovery would be able to grow old, as it were.
We will watch those future inflation indicators very closely for a better sense of when we do need to have an exit strategy, the timing to pull the trigger.
If you were to leave the leading indicators aside, wear your hat just as an economist, tell me, is it time to cheer this number or is it too early?
I would cheer the number. It’s a preliminary number, and the odds are that it will be revised up as time goes by in the subsequent revision this year and years from now. I believe this is a real business cycle recovery, it is not a sugar high or a flash in the pan that many are worried about...
There are problems out there, we are simply not looking at this through rose-coloured glasses, we know that the odds of more frequent recessions in the coming decade are actually higher than they have been over the last few decades and so we are going to have to keep a close eye and just hope that the next recession doesn’t come too soon.