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ECRI Had Forecasted GDP Weakness

Posted by Larry Doyle on July 29, 2011 9:14 AM |

While economists up and down Wall Street express real surprise at the GDP reports this morning, regular readers of this blog hopefully recall the siren sounded by the Economic Cycle Research Institute in mid-May.

I highlighted the ECRI’s warning at that time in writing, ECRI Forecasting Global Economic Slowdown,

The ECRI clearly has a strong pedigree. More importantly the ECRI is not compromised by an existing relationship with a global investment bank or another entity looking to sell financial products. Against that backdrop, the crowd at the ECRI sees storm clouds on the horizon. Just yesterday IBD released a report covering ECRI’s forecast entitled Cruel Summer?>>>>>>>>

A global summer slowdown looms as a leading indicator of factory activity has turned down, according to a well-respected independent research firm.

The Economic Cycle Research Institute’s long leading indicator of global industrial growth peaked at 0.7 in August 2010, predicting a cyclical peak for industrial activity this August. The index stood at 0.1 in March, near the lowest level since January 1980.

“There’s a downturn in global industrial growth in clear sight,” said ECRI managing director Lakshman Achuthan.

Output has already started to decelerate in the U.S., Europe and key emerging market countries such as China that have driven the global economic recovery. Yet Achuthan said he sees no sign of a renewed recession.

The long leading global industrial growth index is comprised of about 60 components that Achuthan said represent diverse long-term drivers of global industrial cycles in some 20 countries, including China and India.

“We’ve found that, collectively, they paint a picture showing clear patterns that highlight the earliest antecedents of global industrial cycles,” he said.

Output in the 17-member euro zone unexpectedly fell in March, suggesting that Q1 economic growth may have been weaker than expected.

Production plunged in Japan following the March 11 earthquake and tsunami.

China’s industrial pace has slowed more than expected amid government efforts to cool inflation.

In the U.S., industrial output was flat in April after rising 0.7% in March, as parts shortages due to Japan’s earthquake hurt auto production. Manufacturing production fell 0.5%.

Factories have been a bright spot in a lackluster U.S. recovery, struggling with a still-weak housing market, tight credit and looming government budget cuts.

The Federal Reserve and the National Association for Business Economics have cut their U.S. growth forecasts this year. Achuthan said about half of all slowdowns in overall U.S. economic growth lead to recessions, though he and other economists said that a renewed downturn was unlikely.

Reduced factory activity has had the benefit of bringing down the price of industrial commodities such as oil, copper and lumber. The growth rate of ECRI’s industrial commodity inflation index plunged to a seven-month low of 18.2% in May from 31.2% in April.

“Commodity price inflation is rolling over,” Achuthan said. “This is a classic sequence, and people need to start thinking about the scenario where global industrial growth once again starts to throttle back.”

Crude oil futures rose back above $100 a barrel on Wednesday — up 3% to $100.10 — but well off their recent peak of $114.83. Copper also rallied, but is down about 8% in 2011.

Analysts worry that some central banks may be tightening credit too quickly.

The European Central Bank raised interest rates last month and is widely expected to do so again in July, as inflation runs well above its target despite turmoil in smaller, debt-ridden nations such as Greece, Portugal and Ireland.

The ECB is “too far ahead,” said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics. He added that the central bank responds to oil prices, which have fallen sharply from their peak amid signs of slower economic growth.

Achuthan said the People’s Bank of China has likewise gotten ahead of itself, tightening too sharply even though the economy has started to slow noticeably.

“China is stepping on the brakes, but a slowdown is baked in the cake,” he said. “The risk is they go too far in fighting inflation.”

A day after reporting weaker industrial, retail and lending growth, the central bank ordered banks to set aside more cash for the fifth time this year.

Monetary policy has a long lag. So recent policy moves, designed to battle inflation, won’t affect economic activity until late this year or early 2012.

On the other hand, the U.S. Federal Reserve has kept rates low and maintained loose policies, viewing the recent run-up in commodity prices as temporary, despite the qualms of a few policymakers. The Bank of England has also kept the monetary spigot open as fears about government austerity measures have so far trumped concerns about soaring inflation.

Based on the prognosis of the ECRI, I would ascertain that our ‘walking pneumonia’ will continue to dog us as we navigate the economic landscape.

The ECRI is a perfect complement to the mission of Sense on Cents. As such you can find a link to ECRI in the right hand sidebar here at SoC.

That tightness in our economic chest cavity that is symptomatic of a ‘walking pneumonia’ economy is clearly getting tighter.

I am not one to typically say, they told us so, but in this instance, they, the ECRI, did tell us so. I check their site and look for their work regularly. If you have any interest in the economy, I strongly recommend that you do as well and then navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.

 

 

  • ECRI’s early forecast was right on the money, but I’m not sure about their conclusion that ‘a renewed downturn is unlikely’.

    I met with one of our banker’s VPs for over 2 hours yesterday during which he painted a very dark picture regarding present business conditions.

    His frustration at having to stay late and come in on weekends just to try and keep on top of ‘souring loans’ was sobering indeed.

  • fred

    Even if we avoid a default by increasing the debt ceiling, rating agencies will probably downgrade our credit rating, within a short time, unless we do something fiscally significant.

    Two suggestions:

    Rather than a balanced budget amendment we should implement a debt to GDP ceiling, to be worked lower during GDP expansionary periods in excess of 2.5%.

    We should also pursue a flat tax, for all personal income, capped at 25%. Imputed income to be calculated, using CPI, for all assets held longer than 1 year, (to be adjusted upon sale).

    Am I the only one who finds it ironic that a country that prides itself on non discriminatory policy in areas such as gays in the military, employment and housing, has a tax structure that’s laced with exclusions, deductions, deferrals, exemptions and credits?

    Aprox 50% of Americans pay no tax, and less than 10% of top wage earners pay the average percentage tax rate paid by the majority.






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