Is there a dark swan event ahead for the American economy?
Summary: Europe is slowing fast. Asia may be slowing. Both trends are closely watched. But despite its fantastic fiscal and monetary stimulus, there are tentative signs that the US is slowing. Here we look at one expert team’s forecast of a recession. If they’re right we’d enter this recession with a 7% fiscal deficit and high unemployment. It would be a black swan event, with the government having few tools to mitigate it.
Here are three reports from the Economic Cycle Research Institute, a well-respected independent shop. They publish the Weekly Leading Indicators, one of the three best-known leading indicators (the other two are by the OECD and Conference Board; see The Economist for details). They expect a US recession in mid-2012.
(1) Their original bold forecast: “U.S. Economy Tipping into Recession“, 30 September 2011 — Excerpt:
Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession. And there’s nothing that policy makers can do to head it off.
ECRI’s recession call isn’t based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index, which was the first to turn down – before the Arab Spring and Japanese earthquake – to be followed by downturns in the Weekly Leading Index and other shorter-leading indexes. In fact, the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not “soft landings.”
… Why should ECRI’s recession call be heeded? Perhaps because, as The Economist has noted, we’ve correctly called three recessions without any false alarms in-between. In contrast, most of those who’ve accurately predicted a recession or two have also been guilty of crying wolf – in 2010, 2005, 2003, 1998, 1995, or 1987.
… It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now. It means an economy that keeps worsening, because it’s locked into a vicious cycle. It means that the jobless rate, already above 9%, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.
Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet. And that has profound implications for both Main Street and Wall Street.
Our year almost without a winter gave the US economy a boost. Then seasonal adjustments, adjusting for the missing winter, made the good economic data look even better. Now we’re past that and the economy again shows signs of weakening. Worse, the global picture has darkened. Asia has began to slow; Europe teeters on the edge of recession. Will we have mutual re-enforcing weakness? After fours years of weakness, Europe and America are ill-prepared for recession.
(2) “Revoking Recession: 48th Time’s the Charm?“, 9 May 2012 — Excerpt (red emphasis added):
For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession.
Has personal income growth ever remained this low for 3 months without the economy going into recession? The answer is no. The chart depicts real personal income growth over the last 60 years, with vertical shaded bands representing recessions, and the horizontal black line marking its latest reading. Except for three one-month dips, income growth has not been nearly this weak in 60 years without a recession – and certainly never for 3 months in a row.
… As students of the business cycle, we admit to being hopelessly biased in our belief that it is simply not possible to repeal recessions in market economies. It is not whether there will be a recession, but when. And ECRI’s indicators are telling us that a recession is likely to begin by mid-year, if not sooner, though this may not become obvious until the end of the year.
(3) “Rising GDP Doesn’t Rule Out Recession“, 11 May 2012 — Excerpt:
Four of the past six recessions started during a quarter when GDP was growing, as did 72% of all recessions in the past 94 years.
How can that be? The answer is that expansions end — and recessions begin — at the peak of the business cycle, after which the economy begins to contract. For instance, the initial quarter of the Great Recession of 2007-09 showed 1.7% GDP growth, while the severe 1973-75 and 1981-82 recessions began with 3.9% and 4.9% GDP growth, respectively.
Revisions are another issue, so GDP could be contracting and we wouldn’t know it for some time. That’s why real-time data often doesn’t show GDP turning negative until about half a year after the recession has actually begun – that’s typically been the case in the past six recessions.
It took more than a year to learn that GDP actually shrank by 1.3% during the first quarter of the 2001 recession. But back then, it was initially reported as having grown at 2.0%. That’s not very different from the latest reading for GDP growth in the first quarter of 2012: 2.2%.
In August 2008 – just before the Lehman collapse – GDP was reported to have risen in the first and second quarters with the latter revised up sharply, triggering over a 200-point rally in the Dow that day. Today we know that GDP actually shrank in the first quarter while the second has been revised down by two full percentage points.
For More Information
(a) About recessions: “What’s a Recession, Anyway?“, Edward E. Leamer, National Bureau of Economic Research (NBER), August 2008
(b) Posts about the economy:
- A status report about the US economy (we party so hard we cannot hear the alarms ringing), 27 March 2012
- The Robot Revolution arrives, and the world changes, 20 April 2012
- About the April jobs report – no new jobs, a result bought at great cost, 4 May 2012
- Do we have a shortage of workers, or just cheap employers? Part one. Part two.