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In March this year, Mr. Lakshman Achuthan and Dr. Anirvan Banerji startled the business world by announcing that the US had entered a period of recession, after a decade of the longest and most sustained growth in its history. Late November, recession was officially announced by the US government. Achuthan and Banerji were speakers at the Holiday party organized by the Global Organization of People of Indian Origin (GOPIO) and Network of Indian Professionals (NetIP NY) held at the Maharaja Restaurant in New York on December 14th.
In his wlecome adress, GOPIO President, Dr. Abraham Abraham said that GOPIO has over a dozen chapters now and hopes to increase that number to 35 by end of 2002. Net IP (NY) President Mr. Suresh Peddu said that his organization would work with organizations such as GOPIO to extend services to the community. The chief guest for the evening was Mr. R.K. Singh, Consul for Commerce at the Indian Consulate who provided brief overviews of the current Indian economy. He stated that since India had followed a different path, it had escaped the severe recessions, which had occurred in the Asian tiger economies.
GOPIO New York coordinator Mr Lal Motwani was recognized for the distinguished service award he had received recently from the New York Managerial Employees Association. Following these formalities, the main speakers, the lucid and erudite duo Achuthan and Dr. Banerji of the Economic Cycles Research Institute (ECRI) took the center stage who spoke on the current recession in the US economy with special reference to IT bust.
Achuthan is the managing director and Dr. Banerji the director of research of ECRI. Achuthan has appeared on CNN, the Lou Dobbs show and on NBC, talking about economics and current money matters. Dr Banerji, an IIT, IISc and Columbia alumnus, is the Director of Research at ECRI. When all the economic pundits predicted, confidently, that the cycles of recession were over and the US could, perhaps, expect only a rising and sustainable, healthy business scene, these two gentlemen predicted that this was, alas, not so.
Achuthan explained that there has been a long
tradition of cyclical recessions. The National Bureau of Economic Research was
their starting point for research and they worked at The Center for
International Business Cycles, now called ECRI. A recession is a pronounced,
pervasive and persistent decline in output, income, employment and sales. A two
quarter GDP decline is neither a necessary nor a sufficient condition for a
recession. Finding the turning points with a fair degree of accuracy is
difficult and this was where their expertise came in. This is easier to predict
in a free market economy than in a controlled economy where various other
factors may come in to play. He explained that a linear forecast has its
limitations because the turning point is often bypassed and the recession not
detected early. This is what the institute works on,
anticipating and finding these crucial turning points because they help business and individuals plan their finances and business operations better, with a fuller understanding of the trends and climate they can expect. He explained leading, coinciding and lagging tendencies. Leading indications anticipate the business cycle, coincidental indicators move in step with it while lagging ones follow the cycle. When the consensus forecast the economy was still booming, they had missed some of these indications. The two showed us their simplified models and indicated the parameters of domestic trade, (i.e. manufacture, construction and services) and the foreign trade (i.e. exports and imports). Inflation and employment were two major indices. ECRI looks at a dozen leading indices and various business cycles of all the G7, emerging markets and, of course, the Indian economy.
The trouble began when people started thinking this
was a different era, business cycles with dramatic boom or bust tendencies were
a thing of the past. People started predicting that downturns could be avoided
and the business cycles were perhaps finally being tamed, if not avoided. These
were errors in judgment. Everybody touted IT, "We are such a productive
economy", was the cry. The consequences were that stock prices bubbled up
and there was overbuilding of capacity. The rallying cry was, "Buy when
the prices are low". Almost all of US capital was IT related. Slowdowns
profits to fall and this led to a fall in investment. The effect of the hike in the world's interest rates was felt. IT suppliers felt these cycles the most, as most of their equipment is cyclical.
"How ironic that the producers of the equipment that was to have eliminated the inventory cycle are themselves its foremost victims," said Stephen Cecchetti on Aug 22 this year. The I of IT, the critical information was what was not noticed.
When asked for the IT outlook for India, they said that recession will go, time and effort will do this. They said that the stronger the downturn, perhaps the sharper will be the upturn. Low cost producers of goods could be the beneficiaries and pointed to Dell, which is gaining a larger part of the market share. When asked about these offers of large interest free loans now available, they said this was to keep the consumer going, to help him buy and stimulate companies.
Dr. Banerji said taming the cycle could not be done. How could negative growth and recession be removed? If the rate of growth is already high, the dips could be, at best, reduced. The trend towards recession is the same but the dips are not felt as much since the volatility is low. What people thought had happened when smaller dips occurred: they simply assumed that they had disappeared rather than note that they were low. But they had made a major leap of faith while the facts indicated otherwise. The more optimistic followers of Keynes felt booms and busts could be eliminated.
The answer in his judgment, was no, they could not be eliminated. Alan Greenspan was not fooled and knew the dip would come. The Goldilocks theory of the porridge being just right was, alas, a dream. The porridge could get too hot as the Japanese expansion of '99 showed. However, because inventory cycles are more controlled, volatility was lower.
The nineties were characterized by a synchronous recession in first, the English speaking countries and then, in the Far Eastern markets. The Japanese economy, the world's second largest expanded, import prices started rising, interest rates increased. OPEC saw a demand for oil going up. Then there was a sharp slowdown. People expect patterns to continue and there is a lag in recognition of changes. Japan was a case, a persistent lag of recognition on an international scale. The IT sector blinded people to the impact of economic slowdown. It grew because it was a young industry, the error lay in thinking that this sector was immune and that set up the fall.
Dr. Banerji stated that there was fundamentally, a good growth period for IT in India. IT is a cyclical industry and if these cycles were understood by Indian companies, they would be more prepared for them, rather than get nasty surprises. Indian IT has its own niche markets and is strong, the growth is strong and not negative. It is still small, focused and caters to niche markets. Companies should pay attention to trends and understand when a slowdown might be expected and not forget that these slowdowns do occur. People need to learn these lessons!
When asked if recovery was in the offing, they said that recovery trends are there but not yet persistent, pronounced or pervasive, not yet strong enough. This current period could last as long as June or July and with enough indications, this could be predicted more exactly. They encouraged everyone to visit their site: www.businesscycle.com as it is updated every Friday.
There was some discussion of luck as a factor and whether this was a frivolous index. The men said it was important to understand that sometimes luck did play a part and to attribute success to it rather than to skills or judgment, which were not really there. The diagnosis is enormously different.
All these variables can be refined further. While this information may not make anyone rich and predict turns with total accuracy, this information is important and "helps you sleep a little better"! For business, it means understanding when a slump may be expected and forewarned is, of course, forearmed. They also said that since today 80% of the people here are in services, the same dramatic dips may not occur.
Achuthan and Dr. Banerji are talented and clear speakers who made it easy for even non-economists to understand their reasoning and their points and how they worked at predicting business trends. "Now, if they could guide us, as simply and as elegantly, to making more money as well, " said one attendee.
Photographs (Photo Credit: Malika Rajan)