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.
- Echoes of Japan
- What is “stall speed”?
- One reason we don’t grow
- 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.
… perhaps the slowing economy is like a gliding aircraft. There is insufficient power for the aircraft to overcome the force of gravity, but the wings are experiencing normal lift and flight control is not compromised. There is no fundamental change in underlying economic relationships in the economy as the growth rate falls. Maybe it takes time for a change in pilot inputs, in the form of fiscal policy and monetary policy, to influence the speed of the aircraft, so that the inevitable shocks to the flight path see the aircraft’s altitude decrease before rising again, creating the business cycle.
But no matter whether or not the economy has a “stall speed”, we’re growing slower than we should. Unless something changes, we look more like Japan with each passing year (see section 4 for details). This is our sorry excuse for an expansion (growth of 2% per year is slightly under 0.5% per quarter):
Look to our past to see what strong cycles look like, with growth of 1% – 1.5% per quarter during the expansion. This is what America has done, and can do again.
(3) One reason we can’t grow
There are many factors at work, such as an aging and more slowly growing population, cancer-like expansion of the financial sector, and increasingly bureaucratic (even dysfunctional) sciences (described in this post). Here’s a technical analysis of the problem: “Potential Output and Total Factor Productivity since 2000“, Brad DeLong, Washington Center for Equitable Growth, 22 September 2014.
But one might play a large and under-appreciated role: the discovery by corporate senior executives that it pays better to strip-mine their corporations than build them. Cut r&d and capex, borrow, then blow the money buying back the company’s stock (watch your stock and options grow). Slowly it’s getting the attention such a serious problem deserves.
- “The short-sighted US buyback boom“, Edward Luce, columnist at the Financial Times, 21 September 2014 — “Unless the roots of the problem are fixed, boardrooms will keep on draining their treasuries”.
- For a detailed look at the the strip-mining of American business see FactSet’s Q2 Buyback Quarterly.
See the posts below for more information.
(4) For More Information
(a) The big question: Are we following Japan into an era of slow growth, even stagnation?, 18 November 2013
(b) Other posts about “stall speed”:
- The dilemma of the US economy: can’t take off & too close to the brink, 9 July 2014
- Has America’s economy entered the “coffin corner”?, 10 July 2014
(c) Other posts about corporations under-investing in themselves:
- Why America’s growth is slowing, and a solution, 28 January 2013
- Portraits of a nation in decline. An unnecessary and easily fixed decline., 14 February 2013
- Four graphs showing a nation in decline. An unnecessary and easily fixed decline., 1 November 2013
- Watch corporations strip-mine their future (and ours), 18 April 2014