03/06/2013 01:05 pm ET Updated Mar 06, 2013

2013 Stock High Comes With New Recession, Warns Economist

The Great Recession began in December 2007, just two months after the Dow Jones Industrial Average hit a record high. Now the Dow is at a new high, and at least one economist thinks we're in another recession.

That's the verdict Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, a private research firm that sells indices of leading economic indicators, posted in a presentation on his firm's website on Thursday.

"[W]hat we see here...are the hallmarks of a recession," Achuthan writes. "Separately, we are not seeing signs of an imminent growth upturn that so many claim to see."

Growth of "nominal" gross domestic product -- fancy talk for GDP that has not been adjusted for inflation -- has dipped below a threshold typically associated with recessions, according to Achuthan. Gross domestic income, which combines all of the money made by companies, governments and humanoids, has also fallen below a typical recession threshold, Achuthan claims. Business and consumer confidence readings are also wallowing at recessionary levels, he notes.

The ECRI has long been a fairly respected forecasting outfit, but its reputation has suffered lately as Achuthan has been calling for a recession since September 2011. His call hasn't worked out so well yet. In December 2011, Achuthan said the recession would not be evident until the end of 2012. Now we are two months into 2013, and the recession is still not evident. As a result, not many on Wall Street are taking Achuthan's recession warning too seriously any more.

But a recession scare flared briefly when fourth-quarter inflation-adjusted GDP first came in at negative 0.1 percent. It has since been revised to positive 0.1 percent, but that is still close enough to recessionary territory to give Achuthan's call a fighting chance of success.

However, Achuthan admits that other indicators still are far from signaling a recession. Employment, industrial production and sales have all been grinding steadily higher. All are used by the National Bureau of Economic Research when it sets the date that a recession officially starts.

But another key recession indicator, personal income, has plunged recently. And Achuthan suggests that the other indicators are either lagging (as in the case of employment) or being distorted by stuff like Hurricane Sandy and the fiscal cliff. And he points out that year-over-year employment growth has stalled lately.

"Quite simply, U.S. job growth is worsening, not getting better," he writes.

The stock market and home prices are also working against Achuthan's recession call, but he has answers for those, too. The stock market is also a lagging indicator, he notes, and can sometimes even rise during a recession. House prices, too, have risen during recessions, he says.

Achuthan says the latest recession is happening in part because we are living through what he calls "the yo-yo years." This means we don't have strong recoveries as we did in the past, but weak recoveries -- and frequent relapses.

Recession or not, there is no doubt that the current recovery is not nearly strong enough to bring 7.9 percent unemployment down quickly. Jobs, wages and home prices are still well below their pre-recession highs, nearly four years after the last recession ended.

But that doesn't necessarily mean the economy is stuck in some dismal new paradigm, as Achuthan suggests. The government has actively worked against the economy by slashing spending at a time when it could have been helping make up for sluggish private demand. And that helps keep the risk of a new recession alive.



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