Listen to the slowing US economy, hear echoes of Japan

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.

A warning. AP Photo/Mark Lennihan



  1. Echoes of Japan
  2. What is “stall speed”?
  3. One reason we don’t grow
  4. 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):


Real Gross Domestic Income


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.


Real Gross Domestic Income


(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.

  1. 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”.
  2. 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”:

  1. The dilemma of the US economy: can’t take off & too close to the brink, 9 July 2014
  2. Has America’s economy entered the “coffin corner”?, 10 July 2014

(c)  Other posts about corporations under-investing in themselves:

  1. Why America’s growth is slowing, and a solution, 28 January 2013
  2. Portraits of a nation in decline. An unnecessary and easily fixed decline., 14 February 2013
  3. Four graphs showing a nation in decline. An unnecessary and easily fixed decline., 1 November 2013
  4. Watch corporations strip-mine their future (and ours), 18 April 2014



13 thoughts on “Listen to the slowing US economy, hear echoes of Japan

  1. WE wish. At least Japan put money into public works like the Osaka airport. The newest airport in NY-Chi-LA is 60 years old.

  2. But how about considering how oil price has risen because of these interventions. Might that also be a factor? Price has gone from $10 a barrel in 1998 to over $100 a barrel currently.

    Japan is a manufacturing powerhouse. However its aging demographics may play a role in this continued problem in Japan. As Seymour Melman’s extensive studies revealed MIC prevented old plant stock from modernizing so it couldn’t compete with new German and Japanese plant stock. An interview of British professor indicated old plant stock problem also in UK;and in both countries this was a reason for financialization.

    1. Winston,

      The price of oil has been affected by our interventions. Preventing Iran and Iraq from increasing production, and temporarily dropping Libya’s output. But the price of oil has risen because the new sources being tapped are far more expensive than the those they replace. If oil went down to $30, production would crash — and drop again as few new wells would be drilled.

      The 1998 low was a brief spike. In 2010 dollars, oil was in the $20 – $30 range for most of the 1980s and 1990s.


    America’s dark economic secret: How a giant gimmick has wages and jobs hanging by a thread
    Welcome to the “gimmick economy” — where it’s not about good products or labor, but something far more scary
    JACK BOGLE: The Financial Industry Has Too Much Power Over Corporate America

  4. There appears to be a dramatic rise in oil prices.Interventions has got to play a role in it. When you have unrest you cannot develop. I knew US would go after ISIS because US firms have invested in Kurdistan. Who is going to invest in Militant Islamist ridden Libya?No one will invest in even Sunni oil and where ISIS is in Syria.

    The problem is also giant oil fields are declining, including the one in Saudi Arabia. WSJ had an interesting article about this issue in an article discussing the declining Mexican giant. They are the ones who supply more oil; and new oil finds do not make up for what is declining.

    1. Winston,

      “There appears to be a dramatic rise in oil prices.Interventions has got to play a role in it. When you have unrest you cannot develop.”

      That’s imagination at work. Oil prices are largely geology.

      “I knew US would go after ISIS because US firms have invested in Kurdistan.”

      Who? How much? US firms got few of the initial contracts; I have not followed it since then.

  5. Wasn’t it one of bin Laden’s main goals to destroy the U.S. economy? (I’ve searched some of your archives on this, but to no avail.)

    If it was, it’s working out nicely.

    1. Pgommit,

      I am skeptical about western analysis of bin Laden’s goals. The pubic material is most what he said to the public, and might not reflect his actual thinking (intel agencies probably have insider materials).

      But it seems clear that sparking a clas of civilizations to unify Islam, and overextension of America, were among his major operational objectives.

  6. The backdrop to FM’s current article remains the bizarre overoptimistic projections of U.S. GDP growth after the 2009 global financial meltdown. These absurdly rosy forecasts came not just from the Federal Reserve (whom you’d expect to bend their growth estimates in a convenient direction to benefit the current administration), but from highly lauded economists.

    Yet everyone with a brain knew full well that nonsensical projections like “Red, White and Boom” put out by the Bank of America, projecting 4%-plus GDP growth, belonged to the same realm of economics as supply side economics and Hayekian austerianism. The entire history of bubbles in modern industrial economies, going back to the 1830s in England, shows that growth after the bursting of huge financial bubble typically remains massively sub-par for at least a generation.

    When absurd projections like the Fed’s 4%-plus GDP growth rates (subsequently revised downward from above 4% to around 2% and still declining) and B of A’s “Red, White and Boom” twaddle hit the headlines, FM knew it was ludicrous nonsense and said so. I knew it was ludicrous nonsense and said so. Paul Krugman knew it was ludicrous nonsense and said so. Brad deLong knew it was ludicrous nonsense and said so. Yet highly educated reputable economists continue to spew these absurdly overoptimistic U.S. GDP growth projections year after year, seemingly without end. And the situation is even worse for the preposterous GDP growth projections about the Eurozone. In the aftermath of their disastrous austerity policies which essentially recapitulate the disastrously failed budget-balancing folly of Herbert Hoover and his secretary of the treasury Mellon, GDP growth in the Eurozone has collapsed so badly that the entire region now risks sliding back into another massive recession. Meanwhile, Krugman predicted this, FM predicted it, I predicted it, deLong predicted it, every economist with even a glimmer of awareness of modern post-1936 Keynesian macroeconomics predicted it. Yet hordes of deluded economists continue to predict (foolishly and inexplicably) that slashing government spending and balancing the budget will somehow produce a miraculous economic recovery in the Eurozone even though the lessons of the Great Depression and every piece of evidence from the Eurozone’s faltering economies since 2009 tells us the exact opposite. As Keynes showed us after the Great Depression, cutting government spending in the aftermath of a huge balance sheet recession caused by a financial bubble reduces GDP growth, it doesn’t increase it. This has been known for 80 years. Yet somehow most modern economists seem to have forgotten it, or never learned it.

    This suggests that something has gone terribly wrong with the economics profession. Valuable basic knowledge has been lost. Economists have abandoned proven basic principles like Fisher’s ISLM model in favor of delusions like “business confidence” and government spending “crowding out” private investment. These delusional economic beliefs predicted skyrocketing inflation in the wake of the Fed’s quarterly easing, yet interest rates have plummeted — something Keynes and Wicksell and Fisher understood and predicted by pointing out the velocity of circulation of money drops to such a low level near the zero lower bound on interest rates that even vast amounts of fiscal stimulus fail to increase inflation. Yet this basic fact about economics in the aftermath of huge financial crashes appears to be been erased from current economics textbooks and the minds of most current economists.

    It is as though physicists had forgotten Newton’s laws of motion and modern thermodynamics and went back to phlogiston theory and Aristotelian physics, in which rocks fall because they want to return to the earth that formed them. If something like that happened in physics or engineering, I think our leaders would be running around with their hair on fire wondering how to fix this horrible loss of basic knowledge. Yet when the same thing happens to economics, our leaders seem to swoon with delight at the supposed wisdom of foolishly false continual predictions of runaway inflation by major economists, whose every assertion turns out to be utterly wrong and completely contradicted by observed reality.

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