Lakshman Achuthan is managing director of the Economic Cycle Research Institute and managing editor of ECRI’s forecasting publications. He frequently appears on CNBC and CNN and is quoted in the New York Times, Newsweek, and The Economist.
What does the stock market’s volatility really say about the economy?
L.A.: It’s telling me two things: One is it’s confirming what other leading indicators have been telling us about the economy, and that is we’re in a recovery.
However, we certainly have a lot of angst and concern and questions and even disbelief in the rise of the stock market, and that may actually be a good thing as the proverbial wall of worry that the market needs to climb during the beginnings of new cyclical bull markets.
What do the third-quarter earnings say?
L.A.: That people have underestimated the extent of the recovery. I know that much of the reason behind companies beating the market’s expectations of their profit growth is because of top-line revenue growth.
And if you think what goes on with profits and how that relates to the economy, part of what a recession is at its heart is companies “right-sizing” so they can again become profitable in a weaker business environment.
This happened in a very vicious, quick way over the past year or year and a half and has largely run its course, and it’s part of the reason the recession itself was so severe, as evidenced by losing 7 million-plus jobs.
How big a drag is unemployment, and when do you see real positive changes?
L.A.: Clearly people who are unemployed are going to consume less, and that’s a drag on the economy; however, the high unemployment rate itself, approaching 10 percent and very likely to go above 10 percent in the months ahead into early next year, is not a bar to recovery.
If high unemployment was a bar to recovery, then we wouldn’t have many recoveries, because it’s always the case that it rises into a recovery.
In the spring of 1933 the unemployment rate comparable to the rate today was 25 percent, yet the economy embarked on a blistering recovery, averaging 10 percent growth for the next four years, and at the same time the unemployment rate fell 3 percent in each year.
To put this in perspective, we just had the worst recession since the Depression, so of course we’re going to have high and rising unemployment.
Also, a technical point on the unemployment rate that we should remember: Population growth requires that we add about 125,000 jobs each month in order to hold the employment rate steady.
