Lead-Lag Live
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Lead-Lag Live
Lakshman Achuthan on Economic Cycle Insights, Yield Curve Un-inversion, and Global Manufacturing Challenges
Join us for an insightful conversation with Lakshman Achuthan from the Economic Cycle Research Institute (ECRI), where we promise you'll gain a deeper understanding of the complex world of economic cycles. Lakshman, a veteran in business cycle analysis, shares his expertise on the intricate dance between growth, inflation, and employment, and how these cycles, though interconnected, often march to the beat of their own drums. Our discussion highlights why economies are inherently cyclical, buffeted by internal dynamics and external shocks, and how recessions often arise when these weaknesses coincide with unforeseen events. The episode also delves into the current economic climate, dissecting phenomena such as the recent un-inversion of the yield curve, providing insights into where we are in the economic cycle and what this might mean for the future.
This episode also takes a closer look at the economic landscape shaped by policies from the Trump administration, examining the structural impacts on employment and broader economic trends. We reflect on how historical patterns and unexpected downturns, like the 2018 inflation gauge surprise, pose challenges for economic forecasting. The global manufacturing sector's struggles amid a prolonged slowdown is another focal point, with discussions on potential recovery sparks and the implications on inflation and economic growth. Lakshman emphasizes the importance of staying open to evolving data and trends, highlighting the disparities between the resilient U.S. service sector and the cyclical nature of manufacturing. Tune in to explore the significance of forward-looking indicators and how they can provide a roadmap for anticipating changes in the economic landscape.
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There are cycles in growth. There are cycles in inflation. There's a third cycle, cycles in employment. These are three key aspects of the economy. Now we drill down inside of all three of those cycles. The reason I'm differentiating them is because they do not all line up. I think it would be simple, or if they did. But just because growth is doing something doesn't mean inflation will do that and turn at the same time, and it doesn't mean that jobs will do that and turn at the same time. They're related but they're different.
Speaker 2:My name is Michael Guy, a publisher of the Lead Lagarboard. Joining me here is Lakshman Achuthan of Ekri. We're going to get into his firm but, lakshman, a lot of people have seen you over the years but for those who don't know your background, who are you? What have you done to write your career? What are you doing now? Oh, what a deep question.
Speaker 1:I got to start easy, got to start easy, deep question, I, I think the best way to describe it. I'm a student of the business cycle and have been since at least 1990, intentionally, I think, unintentionally I've been a student longer. The business cycle theory on the shoulders of his mentors, wesley, mitchell and others who defined what a business cycle was. So now my work and my team, we're the third generation of this cycle research. It has evolved by leaps and bounds and there's so many things more than simply recessions and recoveries when you're thinking about improving your decision-making and, in that cycle, risk management. There's cycles and growth cycles and inflation cycles and growth cycles and inflation cycles and trade cycles and different sectors of the economy.
Speaker 1:Lots of things going on, uh, and that's what we do. We partner with people to kind of help them make better uh decisions, uh, based on an awareness of where we are in the cycle and the cycle, just to locate it for people. Right, there's what's going on right now outside your window, where are we in the cycle of growth or inflation, and then what's the risk of it turning and going the other way? And so an assumption, an assertion I would make, is that we are all swimming around in a big cyclical pool, as long as we're operating in markets and economies and different structures of how places are put together that are dominated by free market activity it doesn't have to be perfect by free market activity, it doesn't have to be perfect, it never is but dominated by free market activity you're going to have this ebb and flow, you're going to have the endogenous cycle and that's where we come in trying to figure out where are we in that?
Speaker 2:All right, so there's recessions and recoveries, there's trends and events. Yeah, I had a conversation with a guy a month and a half or so ago and he made the argument that recessions are no longer a thing, it's really more just events that central banks respond to that cause a temporary slowdown, and that these temporary slowdowns are very much more compressed than ever before in history. Is that valid or is that recency bias? Because that's kind of what's explained the last two, you know, kind of major downturns.
Speaker 1:So what happens is, when you get surprised by stuff, you try to explain it right, and one of the things that you can do we're all human beings, right, we love to tell stories. So something happens and you're like, whoa, here's the story around it, and that includes things like recessions or unexpected events that are out there and what typically happens. What my study? Okay, so I've been doing this since 1990, but I'm not breaking, you know, I didn't discover this, I'm just standing on the results of an external shock combining with cyclical weakness. You need the combination to get the recession. There's plenty of times.
Speaker 1:So shocks let's just stipulate shocks are always happening, Some of them, many of them, negative. Stipulate shocks are always happening, some of them, many of them, negative. And why are some of them going to give you a harder landing than others? And all of our research suggests that it's because if you're cycling down and you get hit, you get a worse outcome. If you're cycling up and you get hit, it may not mean anything. For example, world War II, pearl Harbor that's a pretty nasty shock. No recession. 87 crash pretty nasty shock. That's a quarter of the value on the market, but no recession because we weren't in a cyclical downturn at the moment. So there's a resiliency that is revealed by knowing where you are, or can be revealed depending on where you are in the cycle where you're more or less immune to negative shocks.
Speaker 2:If you're less immune, more or less immune to negative shocks If you're less immune, you got a lot of trouble. All right, so let's talk about the economy here, especially in the context of this more recent un-inversion that's happened on the treasury side on the yield curve, obviously been pretty strong, I think, surprised a lot of people maybe not you as much, given the cycle work but where are we in terms of the economic expansion? What inning would you say it's in, and is there anything that could derail it? I'm going to resist the inning.
Speaker 1:I know it's every inning.
Speaker 2:I hate it.
Speaker 1:I love it, I've seen. So, just to set the stage here right, a cycle could be as short as a year, maybe even a little less. So you got, technically you can have, technically you can have a cyclical upswing. That's a little under a year. It doesn't happen a lot but it's possible and you can have one that lasts two decades an upswing. So the inning analogy can fall short if you understand how it's really not that periodic Right. It also defines how tough this is to know where you are in the cycle.
Speaker 1:Here we had a pretty good cyclical slowdown in 22 into 23. And then some indicators landed coincident indicators landed a little harder than others. But and this makes it very difficult, I think, to understand what has been going on. I mean, we're really in the backwash of COVID, what I'm talking about here you had what we call labor hoarding for a host of reasons that did not allow for there to be recessionary firings, and you have a soft landing. And there are things that happen during cycle downturns that set you up, and they don't have to be to negative growth. They could be decelerations and growth, cyclical decelerations and growth, without going negative. There's things that are occurring in the economy while that's happening, that can set it up for the next upswing, the ebb and the flow of the cycle, and so a lot of that may have been going on right.
Speaker 1:We've been talking about resilience in this economy since late last spring and, even though there were jitters in the markets over the summer and whatnot or other headlines that were concerning people, the resilience has rung true. In our monitoring of the cycle and looking ahead for a risk of less resilience, no, that's hanging in there, um it. It can be uncomfortable to say that sometimes, right, because, uh, we live in an economy where, um you, the other term you may have heard is K shaped economy, where some people are doing, uh, quite well, uh, especially if they have assets that are inflating, and others, who are really living paycheck to paycheck, don't have a lot of assets, are really struggling with the rise in prices levels that we had earlier and you know not, as you know, roughly the same rise in earnings. I mean, it's not, it doesn't add up to a lot, and so that's that K-shaped economy.
Speaker 1:But the bottom line is, resilience is there. It's only gotten more so, and the sticky inflation that we anticipated totally has been there the whole time, and part of that has been this global industrial downturn, which is still kind of hitting things for a little bit, including our manufacturing sector, but let's see what happens. I think 2025 has a lot of action in it on a cyclical basis. I think there's a lot of action cyclically in 2025.
Speaker 2:We'll get into that. But is there a point where the widening of the K and the K-shaped economy that does bring down the economy, the resilience is being driven by just a slight number of asset holders? You can argue or cohorts or a group of the economy that's spending and doing what it's doing? I just reposted from a friend of mine who looked at debt being paid off and people are still paying off from Christmas last year. Yeah, so yeah. But is there a point where that C K dynamic just causes a real problem?
Speaker 1:Yes, if there's recessionary firings. And so if I step back for two seconds, I know I do a lot of stepping back because we're big picture, macro cycle guys right, but there are cycles in growth, there are cycles in inflation. There's a third cycle cycles in employment. These are three key aspects of the economy. Now we drill down inside of all three of those cycles. The reason I'm differentiating them is because they do not all line up right. I think it would be simple, or if they did.
Speaker 1:But just because growth is doing something doesn't mean inflation will do that and turn at the same time. It doesn't mean that jobs will do that and turn at the same time. They're related but they're different. And therefore, looking at the employment cycle first, you just have to recognize we had a big structural hit in employment, a big event around COVID. The labor market pre-COVID was constrained because of less legal immigration. Then during COVID, a whole bunch of people left the workforce even more constrained. Then you throw record amount of excess stimulus, let's say, or spending, fiscal spending, on top of that constraints, constraints, supply, and you get various variations on this labor hoarding and, um, I you know that hasn't really gone away.
Speaker 1:Uh, when we look at what happened with the come down in jobs growth which we have seen. Uh, the more discretionary components of jobs came off. The growth came off as the economy slowed in the rearview mirror and the less discretionary parts and we've written about this and talked about this in our different public statements of education, healthcare, was just knocking it out of the park. I'm talking sitting at like three decade high growth rates, that huge cohort of jobs in our economy and it really offset and did not allow for there to be recessionary job losses. The fundamentals of that have not changed. There's no radical shift in that. The question is did the come down in the discretionary job growth that already happened? Has that bottomed out and is that now coming up? And there is some indication of that now coming up and there is some indication of that. So, more resilient economy and the bottom part of that K and the consumer. Yeah, they're under pressure. I'm not saying the pressure is going away, but there are jobs there and so that's really the critical point right now.
Speaker 2:That's really the critical point right now. You mentioned the structural hit to employment. I wonder if Trump is a structural hit. Maybe, maybe.
Speaker 1:Okay, here's the thing. We don't have to know the answer to that. Our indicators are really good. I mean, these are not put together yesterday. They're watched, we maintain them, we look at them, we take care of them. No-transcript, that's going to show up in these leading indicators and sometimes it's counterintuitive. Ok, coming into the election, the indicators were, as I said, resilient and actually starting to improve a little bit. Post-election, that pattern has continued. I'll remind you, in the previous Trump administration we had in 17,. You had big tax cuts. In 18, you had tariffs come on right. These are both kind of big events structure. You say, hey, this is going to impact the economy, right, and pre-tax cuts. The indicators, back in 16, again, were going up, even pre-election there, 2016. And so tax cuts positive. On top of that rise In 2018, everybody's worried about inflation.
Speaker 1:The Fed is on the hunt. People are concerned about inflation. Tariffs are coming on. Our future inflation gauge turned down in the fall of 2018. Now, if anybody wants to go back and look, nobody. Nobody was saying that You'd had tax cuts. The economy was doing all right, unemployment was low and tariffs were coming on and the future inflation gauge went down.
Speaker 1:And Powell went out and I think he was talking to Judy Woodruff and he's talking about we're a long way from our star and everybody's getting upset and the market tanks in December of 18. And then Powell does his. You know, we get the word pivot comes into the headlines. Future inflation gauge nailed that the inflation was going down. It turns out inflation wasn't running up. Tariffs in that instance were not going to drive inflation up in that instance. I'm not saying that they always won't drive it up, but in that instance no. So here I don't want to prejudge what's going to happen. I don't want to predict the predictors. I remember having lunch with Dr Moore and every once in a while, when you're a kid, you hear something and you're like, oh, that sounds important. And he says, yeah, you don't predict the predictors. And here's this seasoned giant in business cycle forecasting saying, don't do it, let's wait and see what happens. And so I'm not going to do that here. I'm open to the idea that we could be surprised.
Speaker 2:You sent me a note saying we're at a sort of a two speed economy, manufacturing being the lower speed. Obviously, let's talk about manufacturing, especially under a Trump administration, if that changes.
Speaker 1:Again, this is where the tariffs are going to kick in hard in people's thinking and their storytelling around it. First, just to set the cyclical table, we've been in a global industrial slowdown for a long time and it has really hurt the industrial, the manufacturing sectors of economies around the world. It's not a US specific issue. So our manufacturing is feeling it right. Like you see, the ISM is just beat up. So it's beat up so much that people are like what's going on with that? Right, it's weird and certainly you know Europe and China is just getting nailed by this and as a result, you see earlier on, for the most part with a broad brushstroke, commodity price inflation down and we're still in that. That's not over right, so the headlines will still show you that. But of course, we're trying to manage risks right, we knew that one was coming and we managed it.
Speaker 1:Now we're trying to look and see what's that prospect. It's all very binary. What's the prospect of it flipping and going the other way? And there, you know, to 2025 could get interesting. We could bottom out there of the US economy that is under pressure. The services side and the construction side for various reasons they haven't been those are doing okay, and so in that sense we've had this resilient economy has included a weak manufacturing sector, and the other thing to understand about the different sectors of the economy is that manufacturing has a much bigger cycle in it than the overall economy for a whole host of reasons, but it's many, many times more cyclical than the rest of the economy. So if the overall economy is doing this, manufacturing is doing bigger cycles. So if we get towards the bottom here and it moves up, it really has a nice lift for the overall economy. We're watching for that.
Speaker 2:If that does happen and you get suddenly it's a global reacceleration of manufacturing, suddenly that sounds really inflationary. Yeah, I think I'm wrong on that.
Speaker 1:It does. You're absolutely right. All of these, you see, but the thing is, I think the way we tend to think, and certainly the way most models are built, is to add stuff up, so if there's growth, then there must be inflation. Actually, if you look over centuries, as we've done, and over many different economy market-oriented economies around the world, including all the emerging markets and all the big ones, what you find is that it's not that simple. There are times of growth without inflation, inflation without growth, growth without jobs all kinds of stuff happens. It just does not add up that easily, and so, therefore, you can have a moment, it's possible, where growth is strong without inflation. That can happen, and so that's what I'm describing.
Speaker 1:There is Goldilocks, right, pretty much, but you know, the porridge doesn't stay the right temperature forever. It changes and the bears come home at some point. So it's a moment in time, and I think that's another important thing to think about our work and what insight it provides is around time, really Time and direction as opposed to magnitude. So now, if and now I'm totally speculating I don't know what is going to happen with the Trump administration's policies, but if they're slapping on things that are going to impact trade, right. The question then becomes in our minds, because we think of things cyclically if and I'm speculating there's a global industrial upturn I don't know that today, right, I'm watching for that If there were, how would a policy interact with that?
Speaker 1:Okay, I slap on some things that are restrictive to trade. But as big, as important as the U S president administration is, I'm not sure that it's bigger than the global industrial cycle. That thing's big. Uh, I don't, I don't know that. Um, you're going to necessarily push that around, uh, because we just have to have our perspective here. Um, so we'll see. And and again, I think the leading indicators, the good leading indicators, they add up all the on the one hand, on the other hand stuff and give you something closer to a one to. This probably isn't politically correct, I don't know. But who are one-armed economists, right? That's what you end up with.
Speaker 2:I don't know if we need to worry about political correctness.
Speaker 1:I don't know, I'm just careful.
Speaker 2:I don't know if there's any real way to answer this, but are we still in that lagged window of long and variable lags with the fastest rate hike cycle in history, or are we past that at this point, and maybe I was wrong myself in terms of being concerned about a credit event because of that, because liquidity has obviously kept on countering Fed actions? But are we still in that lagged window where maybe that rate high cycle could still be a ghost to us that haunts us?
Speaker 1:Sure, I mean, it's possible. I'm not going to give up on long and variable lags. I think that's there, but it's not the only thing right. There's other things that are going on. Money and credit are important drivers of growth and in certain aspects of the inflation cycle, and so they're important, but they're not the only thing right. And so when we're looking for cycle turns or risks of a cycle turn, that is part of what we're watching, but it becomes very important if it's joined by other unrelated drivers of the cycle and when they start to move in concert. That's when our indexes will start to move. Our forward-looking indexes, leading indexes, will start to move pretty fast, which then provides us with something to think about. Right, which way are we going to lean? Are we ready for a cycle turn? That's where it starts to enter into whatever decision making process you have.
Speaker 2:Is there any chance that the economic strength and I think I know the answer to this causes the dollar to weaken? Because that's been one of the major stories the last several years is just dollar keeps on strengthening, strengthening, strengthening.
Speaker 1:Let's talk about the currency side. Well, so market calls are a little different than growth inflation calls. Okay, so, first, that's one disclaimer disclaimer. Second disclaimer is currencies are pretty, uh, you know they got a mind of their own in terms of what they want to focus on. Uh, and you know, maybe there's a list of smart man once told me there's, you know he figured out whatever. It's like a dozen things that move the currency markets, uh, but you just don't know which one the market's going to focus on, right? Uh, it might focus in on one or the other, so currency is very hard to to, to answer your question.
Speaker 1:So, having said that, what do we know?
Speaker 1:Um, so, our indicators globally, our internet we've covered 22 economies globally. They are designed in a way that is very different than how most people would go about it, in that they're designed at their core to be comparable across borders, so that the growth rate in the US long leading index has meaning when it's compared to the growth rate, for the growth outlook has a bearing, and right now, the US is decidedly better looking than the rest of the world, and it has been for a while. Right, and it still is, and so, on a cyclical basis that's probably supportive. And then, on a related note, is the relative inflation pressures, and by and large, everybody's had some version of sticky, even though they don't want to admit it. The headlines have been flattered by lower oil prices, but the core has been hanging in there, and that could be a real issue on this score in 2025. Uh, what is the relative uh relationship among these inflation cycles? We already know the growth one US looks oh, it's a less dirty shirt, it looks better than the other big regions of the world.
Speaker 2:Yeah, it's just interesting to see how that could shape up. What are the parts of the economy that I mean? If manufacturing may have bought them, what may have topped or be near its top?
Speaker 1:near its top. Um, I mean, the market's priced pretty well. Uh, you know I don't want to make a market goal, but it looks, you know it's near it. I don't know if it's at the top, but it's, it's up there. Um, I mean, we right, we have a lot of parts of the world moving down and so we're looking to see if they're bottoming.
Speaker 1:The US, as I've said, is resilient and maybe becoming even more so. I think inflation is an open question in 2025. And we have to see which way that can break. And we have to see which way that can break. Jobs seem to be kind of hanging in there with this resiliency. I think that's. You know, we had earlier said what had kept us away from a hard landing. It was really that labor hoarding. If there are some policies that get put in place and how those manifest in the leading indexes, which I'm eager to know, I don't know. Today, even something like home price inflation is fir, is is firming, uh, uh, in the U? S. So those are. So I'm looking for things that are at their highs. I don't, I don't, I don't have an easy off the cuff answer for you.
Speaker 2:That's why I asked you the question. That's a good question. I just to sort of see where they're well, but I guess maybe an extension of that would be. Um, it's then sounds as if different parts of the economy will co-move closer than they have in the post-COVID era.
Speaker 1:We have to see what happens with manufacturing. We don't know. We know it's been cycling down, we know why it's part of the global industrial growth downturn and we have to see does that bottom or not in 2025? That's an open question. We're monitoring it like a laser beam, we're on it. If it moves to the upside and the other ones don't come off, you go from a two-speed to a one-speed economy, which is more robust.
Speaker 1:Inflation is a huge question. We have to see which way that's going to break in 2025. I wouldn't prejudge it and I think there's a lot of questions around incoming policies, right? So tariffs, if you just do simple math, are inflationary. But if you get into the more complex math of inflation cycles, it's unclear If there's policies around immigration that constrain the labor market, which is already, as I said, tight, and you have some labor hoarding, and that labor hoarding isn't even predicated on the economy firming, right? So if that's the situation there, what is the impact of that? So we have to see how that presents itself in the various leading indicators of the employment cycle, of the inflation cycle and then ultimately, in the cycle of growth. You know, at the moment I'm probably, you know less, you know I'm reasonably calm, despite all the headlines. Let me put it that way.
Speaker 2:So about the research on the ECRI side? Obviously you've got a lot of institutional players tracking your stuff, but make the pitch for somebody who's more on the retail side as to why they you're taking If you're going to change jobs make a make, a make, a big life choice, uh, uh, of, uh, of, of houses, or marriage for kids, I don't know.
Speaker 1:There's those kinds of things you're going to do on your own. But if you're gonna make a big investment, a big uh, a jobs choice, um, when the cycle is moving up, uh, it might give you confidence to do that. Um, and if the cycle was falling apart, you, you, you kind of want to just uh, uh, tighten your belts and keep it a little, a little closer. I think at the moment, uh little closer. I think at the moment things are pretty resilient. I don't see a lot of vulnerability at the moment in the economy that could change.
Speaker 1:But today, and that's how you use this is just risk management at the end of the day, if it's asset allocation, it's risk management, balancing them. If it's business management, when do you want to add capacity? When do you want to pull it back? When do you want to push your pricing? When do you want to hold off hiring? And then I think those kind of things can, can come over into your personal life, to your individual life. Uh, even, uh, though you might have a plan to be like, hey, I'm saving X amount, uh, uh, each month. Uh, when are you? You're you're probably not doing a lot of active management, so that's probably just a good plan in and of itself to try to get some assets management. So that's probably just a good plan in and of itself to try to get some assets. But right here, I think if you hear me coming on saying watch out, then you want to be a little more careful in taking risks.
Speaker 2:That's how I would say it. Lots of it for those who want to track more of your thoughts, more of your work, or what would you point?
Speaker 1:them to Businesscyclecom. That's the easiest one. Our team of creators our website last year, so it looks really we're very proud of it. We also have a YouTube channel now and LinkedIn. If you join us over there on LinkedIn, I think there's a newsletter, so you just kind of get a little reminder. Hey, here's what's going on this month, uh, and cycles, and, and those are all great ways to get to know um cycles I. The other thing I like about cycles is you, you just don't have to. You don't have to um, get too excited about it unless there's a turning point, uh, and then, and then that might be a sign to make some adjustments. I think there may be a few in 2025. So I would check in every once in a while in the new year.
Speaker 2:Always enjoy talking and listening to Lachman. Everybody, thank you for watching. I'll see you all in the next episode of Lead Lag Live. Thank you, lachman, appreciate it. Bye-bye.
