ECRI interview on bloomberg radio

Tom Keene of Bloomberg radio interviewed Lakshman Achuthan on Friday November 16, 2007. I thought it was a very good as it went into greater detail than you often get in a short few minutes on TV.

ECRI is cautious on Europe, indicators show profits, inventories, capital, employment, and interest rates have Europe looking worse. They have been going down for some time. U.S. GDP growth this year has been stronger than Europe. This is a fact not a forecast but it is hard to find someone that will recognize that. It seems now the strong Euro vs. U.S. Dollar has gotten comparable to the shoe shine boy giving J. P. Morgan stock tips. Or maybe supermodels doing an infomercial for Euros. The Dollar is critical to ECRI analysis. If it begins affecting import prices its one of many drivers of U. S. inflation. An example would be oil prices. On the other hand the positive side is U.S. exporters look attractive abroad.

Germany is the weakest now in Europe. Domestic demand is low and a stronger Euro is making exports more expensive. Japan and France are not happy with the weak Dollar. The three largest economies in the World are saying the U. S. Dollar is too low.

All this is to be expected things do not move in a straight line, they have their ups and downs or cycles. Bouts of euphoria and excess pessimism is psychological and that can get tricky. It can be a component of the slowing growth we have ahead of us now.

Despite what is going on in the big economies the developing economies abroad. India and China look good. Even some of the less developed economies like Korea, Taiwan, Australia, and Canada are looking pretty good.

The same forecasting techniques used in the manufacturing or over all economy apply to the services sector of our economy. Using coincident and leading services indicators you find it less dramatic but it does ebb and flow. As you near a recession service growth goes to about zero, otherwise services are always growing. They look at over all services by dividing it between financial and non financial. Now leading indicators of financial have fallen to the thirty seven month low. Growth outlook has worsened, it’s not over yet however. That is part of the correction we are dealing with now. Non financial services are slowing but at a much more modest pace. Six out of ten of us work in Non financial services in the U.S. That part of the economy is slowing but not dramatically and that is a large part of why a recession is not on the radar screen now.

4.16% yield on the ten year treasury indicates recession fears in the markets. Keep in mind the markets don’t always get it right as to where the business cycle is headed so it could merely be a signal of a slowdown. 70% of the time a slowdown is followed by lower inflation. After Katrina the yield on ten year treasuries went below 4%. Could also be a flight to quality and money abroad in Petro Dollars. Speaking of oil the interviewer quoted oil prices and asked if the 200 day moving average gets in the $90s per barrel does it tilt us over the edge? Lakshman said it certainly part of the slowdown story. But, as long as jobs and incomes are there you can make it work. In 2004 and 2005 we had 70% spike in oil and this one is a little bigger so it is more dangerous but it doesn’t mean you have to have a recession.