Tag Archives: recession

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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Looking back at claims to have predicted the Great Recession

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.

Update: Steve Keen provides additional citations in the comments.

Crystal Ball

First, a background note. By 2006 and 2007 it was clear to many people, not just experts, that the US had a large asset price bubble in residential real estate. Some of the the most obvious symptoms: rising vacancy rates, inappropriate credit extension to borrowers (often fraudulent), and obviously unsustainable prices.

What very few saw was that the collapse of the bubble would send the US into the most severe recession since the 1930. What nobody saw, so far as I know, was that this would spark a global crisis. There were many factors that magnified a sector crisis in America into a global downturn, but the top of the list were the collapse of US and foreign banks. This was unexpected, probably even to senior executives at those banks. The widespread belief as late as early 2008 was that the US might fall into a recession, but that the banks were strong. Banking collapses are the one of the two most common causes of severe economic downturns (wars are the other).

Back to the forecasting game. One economist often cited as predicting the crisis is Steve Keen (retired Prof Economics, U Western Sydney.). He often makes this claim, most recently (and unusually mildly):

Back in the Olde Days, before the global finan­cial cri­sis, when I was one of a hand­ful rais­ing the alarm

Let’s look at the link Keen gives as evidence of his predictive skill: “‘No one saw this coming’ – or did they?“, Dirk Bezemer (Asst Prof Economic, U Groningen), Vox, 30 September 2009 (see the full paper here):

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Are conservatives right about the Fed? Is it a malign force in America?

Summary: Central banks have never been more powerful, more significant to the economy, more controversial (although they’ve often been unpopular), or more misunderstood. Today we debunk two of the myths about their evil they do; at the end are links to posts about their limitations.


World money


  1. About conservatives’ faux history and economics
  2. About investment bubbles
  3. About the joys of unregulated banks
  4. Instead of the Fed, look at the new banks
  5. For More Information

(1)  About conservatives’ faux history and economics

Conservatives have devised a body of faux history and economics to justify their 1%-friendly public policies. Central to this is Fed-hating.  The 1% uses hatred of the Fed to motivate its troops, while cherishing the Fed as one of its most useful agents. The Fed by design supports the banks’ solvency and profits (hence drawing its governors from bankers and known bank supporters). This contradiction shows how our inability to see the world around us prevents our effective political action.

Let’s examine two charges of the Fed haters:

  1. The Fed creates investment bubbles that distort and disturb the economy — unlike the good old days under the gold standard.
  2. The Fed, and the other bank regulatory agencies, restrain the natural entrepreneurial vigor of the banks.

(2)  About investment bubbles

Economic bubbles occur naturally in free-market systems, occurring often even under a gold standard. Such as the 17th century Tulip Mania (see Wikipedia), the earliest documented bubble (although details are uncertain). There are different kinds of bubbles. Here we discuss investment bubbles, excessive enthusiasm for a specific kind of investment which attracts too much capital, followed by a bust.

The giant UK investment bubbles of the 19th century were more similar to those of our time (e.g., in technology and housing). To learn more about them I recommend reading “Charles Mackay’s own extraordinary popular delusions and the Railway Mania” (26 February 2012) by the brilliant Andrew Odlyzko (Prof Mathematics, U MN; his bio here). Excerpt:

Those {bubbles} of the 19th century lasted for several years, and involved huge real capital investments.

… The British mania of the mid-1820s … involved real capital investments of about £ 18 million in joint-stock companies, most prominently for mines in Latin America, and £ 25 million for loans to foreign governments, again largely in Latin America. The total, £ 43 million, was slightly over 10% of British GDP of that period, comparable to $1.5 trillion for the U.S. today, and was regarded by the British public at the time of the Railway Mania in the 1840s as an almost complete loss.

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Status report on the US economy: where we are, where we’re going

Summary: After a near-recessionary 4th quarter (and the start of the extraordinary QE3), the US economy slowly accelerated during the first two quarters of 2013. Much depends on that growth continuing. With monetary and fiscal policy already running at full throttle, another slump would force ugly choices. Today we survey the confident (but shrinking) forecasts of economists and the unexciting recent data.

“Physicians teach that there are three kinds of spirits: animal, vital, and natural. The animal spirit has his seat in the brain … called animal because it is the first instrument of the soul…”
— Bartholomew Traheron’s The most Excellent Works of Surgery by John Vigon (1543)

Crystal Ball


  1. Status report on the economy
  2. What the professionals expect
  3. Other posts in this series: waiting for the boom!
  4. For more information about the US economy
  5. Sunrise will come eventually

(1) Status report on the economy

“The Increase of our Foreign Trade … from which has risen all those Animal Spirits, those Springs of Riches that has enabled us to spend so many millions for the preservation of our Liberties.”
— William Wood’s “Survey of Trade” (1719)

Q2 GDP was +1.7%, below the 2.0% “stall speed”. Q3 is forecast to be +2.3% and Q4 a rosy +2.7% (see section 2). The data from June and July shows few signs of an acceleration in growth. In fact there are hints that the economy is slowing. And the doubling of the 10 year treasury yield has not yet had its full contractionary impact.

On the other hand, confidence surveys remain strong — some are growing stronger — which gives comfort to the optimists, such as builders’ confidence, consumers’ confidence, purchasing managers’ confidence. “Confidence” is a proxy for Keynes “animal spirits”. It’s become a new obsession of economists, and the foundation for belief in the stimulative powers of quantitative easing.

Since I lack confidence in confidence surveys as a measure of animal spirits, let’s look at some hard data: coincident indicators of economic activity. These show where the economy was, and what people did rather than what they say they will do.

(a) Freight traffic: slow growth

Traffic is a crude but effective measure of economic activity.

(b) Credit: stagnant

Credit growth long has been a reliable indicator of US economic growth. Look at the YTD numbers in these kinds of lending, per weekly St Louis Fed report:

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Is there a recession looming in our future? Let’s review the evidence.

Summary:  Today we have a status report on the US economy, focusing on the odds of a recession during the next year. This will provide context for the revelations in Friday’s new data festival, which could radically change the picture (so expect no conclusions here).

“You cannot prevent what you cannot predict.”
— ancient wisdom



  1. How are we doing today?
  2. What’s the trend?
  3. Taking the temperature
  4. What are the odds of a recession?
  5. What is a recession?
  6. Other posts in this series
  7. For More Information

(1) How are we doing today?

The US economy is $16 trillion component of a $72 trillion world. It seldom rolls over quickly, except from an external shock (e.g., the 1973 oil embargo). No such shock seems likely now.

On the other hand, we only know for sure where the economy was a few quarters ago, not now — despite the confident guesses of professional and amateur economists.

(2) What’s the trend

The US economy has been growing at an average of 2.2%/year since the start of the recovery (Q2 of 2009 through Q1 2013), with slow periods met by government action (fiscal or monetary stimulus).  As of Q2, GDP is 3.9% above the previous peak (2007 Q4).

The last three quarters been well below stall speed: real GDP grew 0.1% in Q4, 1.1% in Q1. and 1.7% in Q2. The scary slowdown in late 2012 drove the Fed to adopt the extreme expansion of the Fed balance sheet called QE3 (since politics have ruled out the more effective and useful fiscal policy).  As a resut, GDP has risen 1.4% during the past 4 quarters. Recovery!

Since the economy was far below stall speed  (<2%) during the past three quarters, we might be in recession now. Especially since economic indicators are often mixed during the slide, then revised downward.

The average revision of GDP from the advance to final revision is 1.2%; the standard deviation of revisions is 1%. So it is possible that Q2 might be revised to a negative number (details here).

(3) Taking the temperature

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The US economy is slowing. Things might get exciting if this continues.

Summary: In an this time of almost unprecedented economic intervention by governments — experiments on a scale never before attempted during peacetime — determining the state of the economy is difficult. Determining the near future of the economic is almost impossible. Determining the distant future requires psychic powers. Today we continue our series of looking at the data and guessing about the future.

“It’s hard to make predictions, especially about the future.”
— Aphorism, origin unknown



  1. Accurate economic forecasting is difficult.
  2. The recovery takes a nap
  3. What happens if the US slides into a recession?
  4. Look at the big four indicators
  5. What is a recession?
  6. Other posts in this series
  7. For More Information

(1) Accurate economic forecasting is difficult

“The worst is behind us. … And what did the worst do to us? Slowed growth to 0.5% in one quarter. Boo frickin hoo.”
— M Simon of the Classical Values website, mocking my warnings about the economy. Said on 27 August 2008, just as the economy was about to go off a cliff

The US economy is large, complex, and rapidly changing. Economic theory is immature. Our economic data collection agencies are grossly underfunded. The combination makes accurate forecasts almost impossible, especially detecting inflection points. Even economists find it difficult, proven by the record shown by surveys of economists. The best known are the Blue Chip Financial Forecasts and the Wall Street Journal’s Economic Forecasting Survey (available to non-subscribers here). Neither has ever forecast a recession.

(2) The recovery takes a nap

The US economy has been growing at 2% – 2.5% since 2010, with slow periods met by government action (fiscal or monetary stimulus). The last two quarters were slow growth: real GDP grew 0.4% in Q4 and 1.8% in Q1. Q2 looks to be another slow quarter. The consensus was +2% before the June data started to come in; now estimates are dropping fast (updated July 19):

We use the finest forecasting tools

  • Credit Suisse: +1.1%
  • JP Morgan: +1.0%
  • Bank of America -Merrill: 0.9%
  • Goldman: +0.8%
  • Macroeconomic Advisers: 0.6%
  • Barclays and Royal Bank Scotland: +0.5%
  • Morgan Stanley: 0.3%

We are in trouble if the theory about a “stall speed” is correct — that slowing below roughly 2% increases the odds of a recession. On the other hand, forecasts for second half and 2014 GDP are not being cut, so the gap between first half and second half GDP is widening fast — reflecting confidence about the transient effects of higher taxes, the sequester, higher oil prices, and higher interest rates. Also confidence that consumer spending and business investment will accelerate in the second half of 2013. And, above all, confidence about the wealth effects supposedly created by QE3 (more on this on another day).

In May there were many forecasts for 4% GDP growth in 2015. Now the consensus forecast is 3.0%. Hopes for a boom have dimmed, or been pushed into the future.

(3) What happens if the US slides into a recession?

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