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
- How are we doing today?
- What’s the trend?
- Taking the temperature
- What are the odds of a recession?
- What is a recession?
- Other posts in this series
- 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
There seems to be widespread complacency among economists about the effect of higher rates and higher oil prices, which must offset some or all of the fiscal boost (end of the contractionary effect of the new taxes and the sequester).
The data was mixed during the past quarter. For example, Thompson’s current estimate of Q2 corporate earnings for the S&P 500 excluding the financials is down 0.4% QoQ — far below expectations at the start of the quarter.
June seems to have ended weakly, by several measures.
- June Durable Goods New Orders were up 4.25% MoM SA (unchanged ex-transportation). Up 10.8% YoY NSA (up 3.7% ex-transportation)
- June Construction spending was down 0.6% MoM, up 3.3% YoY (both SA)
- June Restaurant spending was decelerating (growing but slowing): 100.7, down 0.9% MoM NSA (3 month ma is +0.3%)
It is too soon to say much about July, but we have some early results.
- July light vehicle sales were down 2% MoM SAAR, less than the consensus forecast, up 11% YoY.
- New unemployment claims continue their slow decline.
- The purchasing manager indexes for the US were strong. suggesting continued slow or better growth in manufacturing.
- The Jobs report was lackluster. Gains were the lowest since March; the 3 month moving average of gains dropped; labor force participation continued its decline; the new jobs were mostly part-time; no gain in hours worked or earnings.
Most measures of credit growth, such as bank lending and outstanding corporate paper, have been flat to slow all year. Credit is usually a reliable leading indicator, but perhaps not during a balance sheet recession like ours.
What is rocking in the economy: many asset prices! Farmland, home values, stock prices. Even oil prices are joining the party. Whatever the cause (I vote for QE3), this has produced euphoria in many people – who believe that market prices foretell the future of America — or even make it happen (aka the wealth effect). Color me skeptical.
(4) What are the odds of a recession hitting soon?
A recession could get interesting. Especially since it’s expected by almost nobody; most expect slow or accelerating growth through 2015 or 2016. One of the exceptions is John Makin of the American Enterprise Institute: “Third time unlucky: Recession in 2014?“, 30 July 2013. Another is the Economic Cycle Institute, who believe a recession began in 2012.
For another perspective see a tool developed by James Hamilton, Professor of Economics at UC-San Diego. His Econbrowser Recession Indicator Index is flashing a warning. It’s an indicator of contemporaneous data — the quaterly indexes are not changed as data is revised after the following quarter (i.e., he just released the index for Q1). Article about his Indicator here.
It jumped from 9.2% in 2012 Q4 to 30.5% in 2013 Q1. That is higher than the levels in the first quarter of the past two recessions (27.0 and 26.9%). On the other hand, there have been two sets of false alarms at this level of the indicator:
- 1985 Q1: 30.0%
- 1985 Q4: 26.6%
- 1995 Q3: 32.8%
- 1995 Q4: 32.5%
Given the weak Q2 data, this suggests significantly high odds (but less than 50%) that we are now near a recession.
Also, the graph suggests that this indicator has shifted from a leading to coincident indicator. It gave no warning of the last recession; 2007 Q2 and Q3 were 9.5% and 7.7%. There are few constants to economic forecasting.
(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.
(6) Other posts in this series
- The greatest monetary experiment, ever, 20 June 2013
- Status report on the US economy. Recession? Collapse?,
25 June 2013
- Look at the US economy. Do you see the coming boom?,
1 July 2013
- Good news about the US economy!, 2 July 2013
- The June jobs report: continued slow growth bought at a high cost, 5 July 2013
- A look at the state of the US economy. Join me in confusion!,
13 July 2013
- The US economy is slowing. Things might get exciting if this continues., 17 July 2013
(7) For more information about the US economy
- Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
- Government economic stimulus is financial heroin, 28 December 2009
- The Robot Revolution arrives, and the world changes, 20 April 2012 — about structural unemployment
- America is rich and powerful because we can borrow. Will this debt build a stronger America?, 5 June 2012
- America’s strength is an illusion created by foolish borrowing, 10 October 2012
- Portraits of a nation in decline. An unnecessary and easily fixed decline., 14 February 2013 — Why are we not using fiscal policy?