Status report on the US economy. Recession? Collapse?

Summary: Today we have a brief status report on the US economy, touching on some items of concern. The big question: after four years of slow growth, has the air leaked out of our party balloon?


  1. Status report about the US
  2. A quick look at the world
  3. Recession watch
  4. What about another bust like 2008?
  5. The coming collapse?
  6. Other posts in this series
  7. For More Information

(1) Status report

Despite widespread belief that the US economy has been stagnant or even falling, it has been growing since 2009 by almost every metric, at roughly 2% per year. It is a weak and narrow recovery:

  • 2% is stall speed, below which we tend to fall into recession. Hence the annual sequence: first half strong, second half weak, apply stimulus to arrest the slowing. Repeat.
  • The benefits have been narrowly spread. Large corps more than small. Rich more than middle class.
  • It has been driven (or fueled) by large and almost continuous fiscal and monetary stimulus , which allowed slow growth while the private sector deleveraged.

Most of the people now warning of collapse have spent the past four years saying the stimulus would not produce growth, but would produce a falling dollar and rising inflation. Their trifecta of failure has not discouraged them or their admirers. This is one aspect of the failure to learn which is one of our major problems.

Some of the economists whose forecasts have proven correct have warned that Japan is our peril — that this cycle will continues to be too slow, shifting debt from private to public sector, inflation flat or falling, and the US dollar too strong. Not horrific, but not good if it continues for another four years.

(2)  A quick look at the world

The state of the world economy is too complex for brief analysis, with many valid perspectives. Here are two quick ways to look at the current trends and forecast the future.

(a)  The trend

The world has been slowing, as we see by looking at the world’s pulse: trade flows, as measured by the World Trade Monitor of the CPB Netherlands Bureau for Economic Policy Analysis (through April):


CPB Netherlands Bureau for Economic Policy Analysis
CPB Netherlands Bureau for Economic Policy Analysis

(b)  Looking forward

There are several excellent world leading indicators. My favorite is the OECD’s Composite Leading Indicator. It has correctly forecast slow growth, and suggests that growth might be accelerating.

OECD Composite Leading Idnciator
OECD Composite Leading Indicator

(3) Recession watch

Since the crash, many people — mostly conservatives — have forecasted another recession, or even a collapse. A recession would be a commonplace event now, four years after the end of the previous recession. Some metrics show the economy slowing since last Spring, and some indicators have fallen to typical pre-recession levels. Some (not many) economists have worried about the odds of recession during the past year. The massive unconventional QE3 shows that the Fed staff was, too.

The current consensus forecasts see a boom ahead, starting in the second half and accelerating though 2016. For example, the CBO expects GDP growth to grow from 1.4% this year to 4.4% in 2016 (the fastest since 1999). The Fed also forecasts accelerating growth, but at a slower rate than does the CBO.

But for now the US is slowing. The sequester has raised taxes and cut government spending – both contractionary. Some of these cuts have hit; more are coming. Program cuts are still kicking in as plans finish and contracts end; employee furlough have just begun. As Bank of America – Merrill explained on June 8:

Close to a million federal employees have been told that they will be furloughed for several days this year, but the number that has actually started to take furlough days is quite low.

… The first day of government wide furloughs was on May 24, when roughly 115,000 federal workers, or 5% of the total federal work force, stayed home without pay.

However, with the majority of the furloughs not kicking in until the beginning of July, including the Pentagon’s 680,000 furloughs beginning July 8, the real income shock will not show up until the July personal income and outlay report on August 30.

Government furloughs are coming!
Government furloughs are coming!

How far might the US economy fall in a recession? Recessions usually result from the Fed tightening to cool an overheated economy. The cyclical sectors of the economy respond the most strongly. However, today the cyclicals do not look overheated. Unless there is some kind of shock, like a war), they probably will not fall too far.

Construction spending as a percent of GDP:

Construction as a % GDP
Construction as a % GDP

Motor Vehicle Output as a percent of GDP:

Motor Vehicle Sales as a % GDP
Motor Vehicle Sales as a % GDP

(4)  What about another bust like 2008!

Doomsters thrive by predicting that the past will come again real soon. It seldom does. Another 2008 is not likely soon because US banks, businesses, and households have far less leverage than at their pre-crash peaks.

There are many ways to measure leverage. Here’s one perspective on US households: the financial obligations ratio (FOR): an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgages, consumer loans, automobile lease payments, rental payments, homeowners’ insurance, and property tax payments to the debt service ratio.


(5)  The coming collapse?

A characteristic of the political extremes in the US is their belief in the coming Armageddon — a belief often much stronger in their imaginations than their hopes for a near-utopian society.

The Left today see environmental doom. This is in a sense defying the past, ignoring the amazing progress reducing pollution the developed nations have made since 1960. (of course much more remains to be done in both developed and especially emerging nations).

The Right sees social and economic collapse, the latter usually from hyperinflation and devaluation of the dollar. This predicts a repeat of the past.

Both believe this with a religious-like certainty, despite the lack of current evidence that such things will happen.  They just know. Perhaps they are right.

Or they might have it backwards. The trend of inflation during the past 18 months has been down, falling below the Fed’s floor (intended to give them time to react before deflation).

On a larger scale, perhaps social, technological, and economic conditions have changed. The 19th century was one of deflationary tendencies, the 20th of inflation, and perhaps the 21st will take us back to the 19th century deflation. Perhaps the Fed could not create high inflation without extraordinary measures. Perhaps we are becoming like Japan, just lagging a decade or so behind them.


Perhaps we should be worrying more about deflation:

Better days are coming, for some of us.

(6) Other posts in this series

  1. The April jobs report shows continued slow growth, bought at great cost, 3 May 2013
  2. The greatest monetary experiment, ever, 20 June 2013
  3. Status report on the US economy. Recession? Collapse?, 25 June 2013
  4. Look at the US economy: see the trends!, 1 July 2013
  5. Good news about the US economy!, 2 July 2013

(7)  For More Information

Some interesting posts about the US economy:

  1. What are the limitations of the Fed’s power? It’s neither impotent nor omnipotent!, September 2012
  2. The lost history of money, an antidote to the myths, December 2012
  3. Monetary Magic applied to cure America’s economic ills, February 2013
  4. The World of Wonders: Everybody Goes Nuts Together, February 2013
  5. The greatest monetary experiment, ever, June 2013



5 thoughts on “Status report on the US economy. Recession? Collapse?”

    1. It’s a sad world when I need to, with a thousand other websites discussing this subject. A large fraction are too technical for a general audience; too many contain large amounts of misleading or even inaccurate info.

      The internet makes key data available to all, but for reasons mysterious to me it does work well as a transmission mechanism. Perhaps because posts about basic trends — like the ones about economic and climate science — have a small audience. Posts with wild hand waving and exaggerated statements are more popular.

  1. ” Posts with wild hand waving and exaggerated statements are more popular.”
    Ridiculous, huh but quite accurate.
    Japan but a few years behind is bad enough, though….if you are old or I guess if you are young, too.

    Good info here FM.


  2. Most websites are driven by the need to make money. That requires sensationalism, hype, doomster scenarios, “Amazing financial secrets that will let you survive the coming economic collapse!” and various outlandish teasers like “These people made millions in penny stocks — and you can too” flackery and puffery.

    There’s no great market for telling Americans they’re not special, the world isn’t going to end tomorrow, that many other societies have experienced the kinds of problems we’re experiencing, and that the solutions involve discipline, hard work, social cohesion, public spiritedness, and shared sacrifice.

    If you want to get rich in the U.S. of A., tell Americans they’re the greatest nation the world has ever known, terrifying problems loom unlike any faced by any people in history — but we can overcome those doomsday predictions with our unique combination of Yankee ingenuity, individualism, and daring, without much effort because we’re such a special and remarkably blessed people.

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