Rebound “not happening” in 2011

So says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute.  Why should we believe him?  For one thing, Achuthan was one of the few who predicted a global industrial slowdown near the beginning of the second quarter.  For another … er, isn’t it rather obvious by now?

And actually, the news gets worse from there:

With so much riding on – and priced into – an economic and earnings rebound in the second-half of the year, Achutan not only pours water on that, but ups the ante by saying he cannot rule out slumping into another recession in 2012. “You have a 4/10ths rise in the unemployment rate over the last 3 months. That doesn’t happen in an economy that is reviving or firming or gaining steam,” he explains.

Further, Achutan says “It’s a growth rate slowdown and that’s what the market really cares about. Recessions and recoveries, that’s old news.”

So assume for a minute that Achutan is right (again) and that the growth rate just stumbles along at 1-2%, jobs growth doesn’t materialize and the various Purchasing Managers Indexes stall. Achutan says that will have a devastating effect on earnings and stocks. “Profit growth is pro-cyclical, meaning it can’t disconnect from the economy” he explains, adding that “you’ll have profits. But if you’re interested in if they’re getting better or worse, it’s going to be really tough for them to get better on a sustained basis in a growth rate cycle slowdown.”

Contra Yahoo, it wasn’t exactly rocket science to predict a slowdown in early May.  By that time, we had already seen a significant jump in weekly initial unemployment claims as well as a series of negative economic indicators.  Job creation had obviously slowed as energy and food costs skyrocketed.  Predicting a slowdown after those indicators — and the fact that the preliminary annualized rate of growth in Q1 had already been announced at 1.8% (later adjusted to 1.9%) with just 0.6% real final sales — made a prediction of anything but a summer slowdown Pollyannish at the very least.

At this rate, we’ll be lucky to see a growth rate of 1% in Q2.  We may not be far from negative numbers on GDP, and that may mean a recession earlier than even Achuthan predicts.  Given the significant slowdown between Q1 and Q2 based on the economic indicators we’ve already seen, it seems very unlikely that we’ll get 0.6% annualized increase in real final sales in the quarter just completed, and it’s not far from there to red-ink numbers.

Speaking of red numbers, the Christian Science Monitor’s Stefan Karlsson explains why Friday’s horrid jobs report is actually worse than it looks:

First of all, previous increases in payroll survey employment were revised down.

Secondly, average weekly earnings fell 0.3% as hourly earnings were flat and the average work week fell 0.1 hours. However, at the same time earnings for May was upwardly revised by 0.1%.

And thirdly, the other survey, the household survey, showed a decrease in employment by 445,000. As a result, the entire increase in the employment to population ratio since the cyclical low of 58.2% has been wiped out. The 0.9 percentage point drop in the unemployment rate since then is thus entirely the result of [people] dropping out of the work force, discouraged by the shortage of jobs.

Consumer economies don’t provide rebounds when people are leaving the workforce.  We are not going to see a sudden growth period in 2011, and we’re likely to slide back into recession earlier than most people think.

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