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

Larry Kummer, Editor

13 years ago

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

Contents

Accurate economic forecasting is difficult.
The recovery takes a nap
What happens if the US slides into a recession?
Look at the big four indicators
What is a recession?
Other posts in this series
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):

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?

It’s a question few economists wish to discuss. Some cyclical areas remain so weak that they should not fall far (eg, housing). But many industries and regions remain weak, as does the world economy, suggesting the possibility of a severe downturn.

As for the government’s response — Another round of monetary stimulus would take us further into uncharted terrain. Fiscal stimulus would undo the work done to reduce the deficit, and might prove politically contentious.

A recession could get interesting.

(4) A look at the Big Four economic indicators

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 might be in a recession now and not know it (for the reasons listed in section one above). In a recession GDP typically declines by roughly 2% per year. We can no more detect that by our personal experience than we can sense a slow 2% change in the air temperature. Most economic changes are visible only in the macroeconomic data. As this graph of the “big four” indicators shows, today the economy looks OK (source here).

(5) What is a recession?

A journalist invented the “2 quarters of negative gdp” definition; it is simple but crude. US recessions are officially defined by the National Bureau of Economic Research (NBER) as follows:

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. … Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them.

… Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, “a significant decline in economic activity.” Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.