Status report on the US economy. Recession? Collapse?

Larry Kummer, Editor

11 years ago

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?

Contents

Status report about the US
A quick look at the world
Recession watch
What about another bust like 2008?
The coming collapse?
Other posts in this series
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

(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.

(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.

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:

Motor Vehicle Output as a percent of 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.