Tag Archives: recession

Today’s forecast for the US economy & stock market: cooling, perhaps with storms.

Summary: Today we have another briefing on the US economy and stock market. The situation grows darker, cliffs might lie ahead, but it’s still too soon to say more than that. Read on to learn the details.  {1st of 2 posts today.}


This is a new economic regime, profoundly different than the post-WWII era. Many of the relationships we used to navigate by have changed, as things considered extraordinary have become normal (e.g., long periods of zero interest rates and even negative rates). Yet there are warning signs with a long history of accuracy.

Don’t be comforted by economists’ optimism; many studies have shown their unreliability (especially their inability to foresee recessions). Listen instead to the 30 central banks that have cut interest rates this year, showing their true view of the situation.

For clear advice I recommend reading Albert Edwards of Société Générale, among the most insightful of investment strategists. In this from his 12 February report he gives the essential facts about our situation:

The market seems pretty convinced that the Fed will tighten in the middle of this year and maybe it will. Certainly the labour market is tighter and the Fed tells us that the recovery is well established. But, the Fed always spins a bullish yarn. Their track record of over-optimism is only surpassed by the appalling record of private sector forecasters – most especially in forecasting recessions. A rate hike this year when deflation pressures are intensifying could go down as big a policy cock-up as the BoJ raising VAT {valued-added taxes} in 1997, triggering recession, or the ECB tightening rates in July 2008 when the global recession was already well underway!

His report on 26 February updates that with the missing part of the equation: bad news. US economic data has grown worse since he wrote this.

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Economics gets interesting as the economy darkens while stocks bubble

Summary: These economic status reports grow more interesting as the data shows slowing while the stock market bubbles. It’s nothing like 2007, except in our blindness to events and disinterest in preparing for obvious risks. When the recession arrives (we can’t know when), I believe it will mark the start of a new economic order. The next generation will listen with astonishment to tales of these days.  {2nd of 2 posts today.}

“In a nutshell: Things are looking better — in fact, they’re looking downright good. The economy is showing solid momentum and there’s good news in virtually every sector. I expect U.S. growth to be about 2½% in real GDP. I see the continued improvements in the economy pushing wages and prices up, and inflation moving back toward its target.  I expect to reach full employment by the end of the year.”

John C. Williams (President of the San Francisco
 Fed), 23 March 2015. Be very afraid when you hear such things while the indicators tumble.



  1. One of the big indicators: new orders durable goods.
  2. GDP on recession watch.
  3. Stocks: bubbling again because we don’t learn.
  4. A bear market will wreck the investment biz.
  5. For More Information.

(1)  One of the big indicators: new orders for durable goods

The February numbers were weak, as they have been so often during this long slow expansion. The big picture is that they have been flat during the past 2 years (easily missed if you read the news by the hyperventilating over the little swings). They’re the same level as September 2006, and 5% below the pre-crash peak of December 2007. Almost unchanged from a year ago, any breakdown from here will warn of an imminent recession.

New Orders for Durable Goods: February 2015

(2)  GDP on recession watch

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Updating the recession watch; & what might the government do to fight a slowdown?

Summary: The economic data continues to darken. Let’s review the situation — updating the recession watch — and guessing what might be the government’s response to a recession. It’s an era of new normals, so we should expect steps that would have been considered incredible or even mad a decade or two ago.  {1st of 2 posts today.}

“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
— Dorothy in “The Wizard of Oz”.



  1. The bad news
  2. Worse news
  3. The weak data
  4. What comes next?
  5. For More Information
  6. Perhaps a better world lies ahead

(1)  The bad news

The graph below gives an ugly forecast. But let’s keep this in context, especially now that the doomsters have discovered it. The value of the Atlanta Fed’s GDPnow forecast is its immediacy. They explain that it’s no more accurate than forecasts by economists or other models. Which is to say it’s a best guess made with limited information. Also, the Fed remains hopeful that Q1 is an aberration, so that 2015 has growth of 2.3% – 2.7%.

20150317 GDPnow forecast

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How close are we to the next recession?

Summary: How close is the US economy to a recession? Here we review the evidence and draw a firm conclusion. {1st of 2 posts today.}

The financial press overflows with confident forecasts about everything from individual stock prices to the fate of the overall economy. It’s usually difficult to reliably predict such things with useful accuracy; since the crash it’s become far more so. My prediction each year since 2010 has been for slow growth (in the low 2%’s); that’s proven correct. Let’s try for something more ambitious.



  1. How close are we to a recession?
  2. The Econbrowser Recession Indicator Index.
  3. Looking at Q1 GDP.
  4. How fast can GDP fall?
  5. The current numbers: how are we doing?
  6. Conclusions
  7. For More Information

(1)  How close are we to a recession?

Let’s start with the big picture and move to the details. GDP was moderately strong in Q3 and Q4 at aprox 2.6%. Economists expect a strong economy (as usual). Looks good.

But some (not all) indicators show slowing. That’s sparked excitement from the bears, like this from Zero Hedge: Two More Harbingers Of Financial Doom That Mirror The Crisis Of 2008.

But before examining the data, we need some context. Surveys of consensus opinion of economists have never predicted a recession (correctly or incorrectly). So their sunny forecasts tell us little.

Second, the economy has experienced unprecedented distortion from six years of fiscal and monetary stimulus — including maintaining the short-term risk-less interest rate at zero, long-term government bond yields below the inflation rate (aka negative real rates), plus three rounds of quantitative easing. These have made many of the usual forecasting tools less effective.

(2)  The Econbrowser Recession Indicator Index.

For useful perspective see a tool developed by James Hamilton, Professor of Economics at UC-San Diego. His Econbrowser Recession Indicator Index is an indicator of contemporaneous data — its quarterly indexes are not changed as data is revised. See his article describing it. It now reads 1.6% — low odds of a recession, slowly falling.

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Lessons from WWI about “markets” ability to see the future

Summary: Brad Delong (Prof Economics, Berkeley) reminds us that on this day in 1914 the NYSE ended the longest period of stopped trading. The outbreak of war on 31 July triggered “the longest circuit breaker” in NYSE history. His post, as usual, gives an interesting account of that episode. Who closed the NYSE, and why? There is another lesson from this history, one of importance to us today.  (This is the second of 2 posts today)

Expect the unexpected: fish


“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”

— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia


Stock market strategists and economists often tell us about markets’ fantastic predictive ability (an emergent phenomenon from millions of investors), often to the extent of referring to stock prices as a barometer of economic health. Count me among the skeptics when it comes to forecasting.

Here’s a survey of risks by Nial Ferguson (Prof History, Harvard), typical of those before the 2008 crash. He doesn’t even mention the structural weakness of banks, the factor converting a real estate downturn into a global crash. But then nobody saw this (that I’ve found).

Even in what investors should see best — economic cycles — their record is mixed. Sometimes the market gets it wrong; the October 1987 crash predicted nothing. Sometimes the market sees things a little late: the Great Depression began as the US economic downturn began in August 1929; the stock market crashed on October 29 (timeline here).  Sometimes the market gets it right: the stock market peaked on 9 October 2007, the recession began in December, the economy crashed in Fall 2008 (timeline here).

Geopolitics have an immense effect on markets. Here economists have very poor record of forecasting, although they often see themselves as bookies of geopolitics (they tend to be hawks, which is odd given the horrific history of war’s effects). Likewise, investors poorly assess geopolitical threats. On this 100th anniversary of WWI let’s see how well investors anticipated that climatic event (timeline here).

In hindsight WWI looks almost inevitable. Historians see its origin in two decades of rising geopolitical tensions among the major western powers as William Lind explains. Yet investors back then didn’t feel rising tension. For a scholarly yet readable account I recommend Nial Ferguson’s “Earning from History? Financial Markets and the Approach of World Wars” (Brookings, Spring 2008), which provides the quotes below. An assassin killed the Archduke Franz Ferdinand of Austria on June 28. In the following month stock prices declined throughout the western world. Prices of US railroad and industrial shares dropped 15%. The Vienna stock market crashed on  July 13.

Although selling spread of stocks and intensified, investors in most assets in the so-far unaffected nations remained calm (the bond markets dwarf stocks in size). Similar crisis had been resolved through diplomacy. Europe had not experienced widespread war for a century.  Compelling analysis by experts such as Jan Gotlib Bloch (Is War Now Impossible?) and Norman Angell (The Great Illusion) proved war to be irrational and hence unlikely.

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Listen to the slowing US economy, hear echoes of Japan

Summary: Now in its sixth year, this sorry excuse for an expansion is ready to boom — accelerating to “escape velocity” — according to many economists. Or perhaps the boom grows old, even sclerotic, so we should start watching for the next recession. The consensus of economists never sees a recession until it begins, so we’ll have to find other ways to look ahead. This post describes one such: the economy slowing to its “stall speed”. This alarm might be flashing yellow, or even red, now.


A warning. AP Photo/Mark Lennihan



  1. Echoes of Japan
  2. What is “stall speed”?
  3. One reason we don’t grow
  4. For More Information


(1) Echoes of Japan

Economic Cycle Research Institute (ECRI), 22 September 2014 — Opening:

In 2011 the Fed published a study aimed at identifying “particular values for output growth and other variables, such that when these values are reached during an expansion, the economy has tended to move into a recession within a fairly short time span.”

The study concluded that Gross Domestic Income (GDI) – which, while income-based, is theoretically identical to Gross Domestic Product (GDP) – “provides a better measure of output growth than GDP,” and identified a two-quarter annualized real GDI growth rate of 2% to be the “stall speed” threshold.

… this GDI growth measure (see chart) has now stayed below the 2% “stall speed” threshold for three straight quarters starting in Q4 2013, which is much longer than the duration of the harsh winter weather. …

Real GDI crashed below 2% SAAR in Q2 2006. Before this cycle, since 1947 real GDI had fallen below 2% only once in a period not associated with a recession – in Q1 1993. Real GDI is now below 2% YoY. For the past 3 quarters (and 4 of past 5 quarters) it’s been below 2% SAAR on a QoQ basis.

(2)  What is stall speed?

The concept of a “stall speed” is that the economy slows in the year before falling into a recession, and there is a critical speed below which the economy is likely to fall into recession.

The idea of a “stall speed” became know after a 2011 Fed paper by Jeremy J. Nalewaik, who showed that it predicted recessions better than other methods — and better than the Blue Chip Economists’ Forecast.  It appears seldom in Fed research after several other articles in 2011, such as these by the Cleveland Fed and the Atlanta Fed).

On the other hand, several studies have been skeptical about the concept, such as this 2012 BIS working paper which questioned even the aeronautical analogy.

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More debate about who predicted the Great Recession, and lessons learned

Summary:  The comments on the FM website often have Socratic dialogues, clashing views in the search of truth. Yesterday we had one at the intersection of several of our long-standing themes: debt, deflation, economic theory, making forecasts, and the credibility of experts. Participating was the distinguished economist Steve Keen, discussing if he “predicted” the Great Recession. This is what the Internet could be, if we worked at it.

Raphael: Plato & Aristotle

Group picture taken during the debate (Raphael’s “The School of Athens” (1510)

All the perplexities, confusions, and distresses in America arise, not from defects in their constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.
— John Adams, letter to Thomas Jefferson, 25 August 1787True then; true today.


  1. A dialogue with Keen
  2. About Steve Keen
  3. Paul Krugman looks at Keen’s work
  4. For More Information

(1)  A dialogue with Keen

The opening act: Looking back at claims to have predicted the Great Recession, 8 April 2014

Many economists and financial experts claim to have predicted the Great Recession. That’s important, since these are the people we should be listening to. Oddly, they seldom quote or cite what must be their greatest accomplishment. Let’s look at one such claim, by Steve Keen.

Steve Keen replies (he provided URL’s; I’ve added full citations and sometimes abstracts).

Good grief Maximus,

Why are you even looking at journal papers or book chapters for proof of calling the crisis before it happened? That’s an inherently straw man critique of such claims: have you never heard of publication lags?

My 1995 paper, for example, was written in 1992, and accepted for publication in 1993–and then took two years to turn up in print in the Journal of Post Keynesian Economics.

At worst you should be looking for working papers or monographs, and at best media articles and interviews–because if you think (as I did from December 2005) that a really serious crisis was coming, you don’t bother with the academic production mill with its refereeing and editorial delays. You go for the mainstream media (and of course blogs).

BTW I chose to use Dirk’s Vox paper rather than the work on which it was based because that was an immediate URL rather than link to a PDF as with the paper. If you had checked that –- which you should have, given the claims you’re making here –- then you would have seen this link:  Keen, S. (2006). “The Lily and the Pond“. Interview reported by the Evans {Ed: sic, s/b Evatt} Foundations, 12 December 2006.

The is the story behind Australia’s private debt. It has been growing more than 4% faster than our GDP for 53 years. … It is 147.1% now. If the rate of growth doesn’t slow down, it will crack 150% of GDP by March 2007, and it will exceed 160% of GDP by the end of 2007. We simply can’t keep borrowing at that rate. We have to not merely stop the rise in debt, but reverse it.

Unfortunately, long before we manage to do so, the economy will be in a recession. … So when will this recession begin? On current data, the domestic economy may already be in one.

That’s far from the first such warning I gave of the causes and severity of the crisis I expected (with a focus on Australia since that’s where I live). Here are a few other links for you:

(a) Keen, S. (2006). “The Lily and the Pond“. Interview reported by the Evans {Ed: sic, s/b Evatt} Foundations, 12 December 2006.

The is the story behind Australia’s private debt. It has been growing more than 4% faster than our GDP for 53 years. … It is 147.1% now. If the rate of growth doesn’t slow down, it will crack 150% of GDP by March 2007, and it will exceed 160% of GDP by the end of 2007. We simply can’t keep borrowing at that rate. We have to not merely stop the rise in debt, but reverse it.

Unfortunately, long before we manage to do so, the economy will be in a recession. … So when will this recession begin? On current data, the domestic economy may already be in one.

(b) Why deflation is really possible“, Paul Amery, MoneyWeek, 7 February 2008

(c) Boom in Australia goes bust as global slowdown hits“, USA Today, 28 December 2008

The financial crisis is hitting debt-laden Australians hard. “We’re headed for a recession for the same reason the USA is in one now — the bursting of a debt-financed speculative bubble” … Keen predicts the downturn will unfold a bit differently than it did in the USA, where problems began in the housing market and spread to the broader economy. “We’re likely to go into the macro crisis first as debt growth plummets; then a housing crisis as the newly unemployed are unable to maintain their mortgages; and finally a credit crunch where the banks’ solvency doesn’t look so hot anymore.”

(d) To intervene or not to intervene“, ABC (Australia), 3 November 2008

(e) Holding tight: can Australia ride the storm?“, The Age, 11 October 2008

“I think the comparison (with the Great Depression) is valid and the prognosis is extremely bleak,” suggested Sydney academic Steve Keen this week. … And Steve Keen, a University of Western Sydney lecturer, holds dire views. He has long warned of Australians’ “unsustainable debt addiction”. His latest musings put it this way: “We are not in a Great Depression — not yet anyway — but a key pre-condition for one has developed right under the noses of central banks: excessive private debt.

(f) Economics Meltdown 101“, Reporter: Steve Keen, The Age, sometime in 2008 {Similar content to the (e) article}

(g) Australia facing debt-driven depression“, ABC (Australia), 3 February 2009

The world is facing a “full-blown depression” and Australia needs to drastically rethink its attitude to debt if it is to climb out of its current economic trap, says leading economist Steve Keen.

Prof Keen,

I used that link because it was what you cited. It does not disprove your claim, but does not support it either (as you claimed). Also, as I noted, this shows the crash in US stock and residential home prices — so this is not a case of publication lag.

All that out of the way, thank you for these cites! I looked for an article or blog posts by you following up on your predictions, but could not find it (perhaps limitations of Google, or of my searching skills). I suggest that you write one. Good predictions are too rare to go undocumented, especially amidst all the chaff.

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