"Skunk at the Garden Party" Wary of Dow High

The stock market has been rallying since October and is pushing new highs daily, but one economist is standing by his call that we've been in recession since the middle of last year.

Lakshman Achuthan, head of the Economic Cycle Research Institute (ECRI) and the self-described “skunk at the garden party” first said the economy was in recession on July 10, 2012.

While the Dow Jones Industrial Average has rallied, he sees no reason to use it as a benchmark for economic growth. As he notes, in 20% of past recessions the stock markets continued to climb.

"The stock market went up 30% during 1926-27 recession," Mr. Achuthan said. "It made this market look like it's under-performing. We've seen this movie before."

In the ECRI's latest report, entitled “The U.S. Business Cycle in the Context of the Yo-Yo Years” Mr. Achuthan analyzes nominal Gross Domestic Product (GDP) and real Gross Domestic Income (GDI), along with numerous other indicators.

While GDP is a production based measure, it cannot reveal how relative price shifts affect the volume of goods and services that can be purchased with the income it tracks. GDI allows relative price changes to affect the number of goods and services that may be purchased. Ultimately, they are very similar tools, but they use different deflators and the final figures can deviate depending on the raw data.

The ECRI report cites the Fed's money infusions into the markets and concludes that, “Based on the full 65 years of historical data, nominal GDP growth below 3.7%, which is marked off by the horizontal line, has always occurred in a recessionary context– without exception.”

The ECRI report goes on to cite a Federal Reserve study that concluded “that the best stall-speed measure may be the two-quarter annualized growth rate of real GDI, and when that measure fell below 2% it was a recession signal, because the economy would stall out.”

In this regard, Mr. Achuthan's conclusion is in line with the Federal Reserve's study, as you can see in the charts above.

The ECRI may be alone, but it accurately called the recession in March 2008 as many economists continued to assert that the U.S. economy was not contracting. While the ECRI hasn't been wrong about a recession before, all eyes are on it as the only research group concluding that the U.S. economy has been in a mild recession for 8 months.

As Keith Hembre, chief economist with Nuveen Asset Management noted, "I think he's kind of out there by himself,” yet he readily admitted the economy is in a very precarious position: “To a certain degree, it's semantics. Recession or not, it's not a normal growth environment."