Tuesday, February 05, 2008

The Recession Will Be Televised.

This article explains a little more on ECRI's thinking on the window of opportunity of averting recession.

MSN: Where's a safe harbor now?


There's an odd paradox at work, you see. Lakshman Achuthan, the head honcho of the Economic Cycle Research Institute, which has successfully called the past several U.S. recessions, notes that all the recent pessimism about the economy may actually have had a beneficial effect. He says that the biggest negative impetus in any recession comes from the manufacturing sector, which is in turn driven mostly by the inventory cycle.

Unaware of an approaching recession, he observes, businesses typically produce goods in anticipation of rising demand. When, to their surprise, demand for their products starts falling, inventories mount, forcing production and job cutbacks, thus reducing income and spending power. The spending cuts force further production cutbacks to work off the excess inventory, and a vicious downward spiral ensues.

At present, Achuthan says, we have the opposite scenario. Prolonged pessimism about the economy and a surprise acceleration in growth through last summer has resulted in a sharp drop in business inventories, taking the inventory-to-sales ratio to a record low. Thus there is little inventory left to whittle down in response to slackening demand, blunting much of the downward impulse for recession.

This is where Congress and the president come in. They can still throw American retailers, manufacturers and service providers a lifeline if they pass a $150 billion package of tax rebates quickly and cut checks in the next two months. If a timely stimulus results in a quick burst of consumer spending, manufacturers will boost production instead of reducing inventories, thus preventing economic Armageddon. Time is of the essence: The Economic Cycle Research Institute suggests even a three-month delay in getting rebate checks out could spell the difference between a bone-crushing recession costing thousands of jobs and a nice, soft landing.