Summary: The economic data continues to darken. Let’s review the situation — updating the recession watch — and guessing what might be the government’s response to a recession. It’s an era of new normals, so we should expect steps that would have been considered incredible or even mad a decade or two ago. {1st of 2 posts today.}
“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
— Dorothy in “The Wizard of Oz”.
Contents
- The bad news
- Worse news
- The weak data
- What comes next?
- For More Information
- Perhaps a better world lies ahead
(1) The bad news
The graph below gives an ugly forecast. But let’s keep this in context, especially now that the doomsters have discovered it. The value of the Atlanta Fed’s GDPnow forecast is its immediacy. They explain that it’s no more accurate than forecasts by economists or other models. Which is to say it’s a best guess made with limited information. Also, the Fed remains hopeful that Q1 is an aberration, so that 2015 has growth of 2.3% – 2.7%.
(2) Worse news
“Come on, everybody to the storm cellar.”
In January 2011 the Federal Reserve governors estimated the long-term growth rate of the US economy at 2.5 – 2.8%. Now it has fallen to 2.0 – 2.3%. That’s a large drop, which would have a massive effect on America over the next decade or two. Years of low investment by the private and public sector (see links below), a decaying education system, rising debt levels, and demographic headwinds (an aging society) — all these things slow America’s growth.
Hopes for this cycle’s boom are dropping even faster, as seen in their GDP forecasts. Note how expectations for 2 years out have come down (from 3.0% to 2.5% to 2.3%).
- 2015 from 3.0 – 3.8% in Sept 2012 to 2.3% – 2.7% now.
- 2016 from 2.5 – 3.3% in Sept 2013 to 2.3% – 2.7% now.
- 2017 from 2.3 – 2.5% in Sept 2014 to 2.0% – 2.4% now.
They are confident, as economists usually are, that there will be no recession in the next 2 – 3 years. Recessions are a surprise.
(3) The weak data
Since the last update we’ve had more weak data. Industrial production peaked in November, with February -0.5% from peak. Retail sales peaked in November and have dropped for 3 months, with February -2.3% from peak. Business inventories have risen faster than sales since April 2011, pushing up the inventory/sales ratio by up 8% through January (with an especially fast rise in Jan and Feb).
The slowing has been broadly based (not just petroleum, which is a small part of the economy). It’s also been geographically broad, not just in the cold Eastern states.
Some data has been strong. The Baltic Dry Index — the cost of moving bulk cargo by ship (e.g., coal, iron ore) — is 571, up 12% from its record low of 509 on Feb 18. The major indicator of housing construction was mixed in February (permits strong, starts weak).
(4) What comes next?
“Professor Marvel never guesses, he knows!”
The US economy might be in the dilemma described in previous posts: we’re unable to accelerate but any slowdown quickly takes us below stall speed of 2%, below we’re at risk of recession. See The dilemma of the US economy: can’t take off & too close to the brink and Has America’s economy entered the “coffin corner”?
Should the US fall towards a recession, the Fed could do QE4, since the first 3 rounds had no obvious ill effects. But the government’s arsenal has more powerful weapons, as other nations have tested extraordinary tools for government economic stimulus. First, the Fed can set interest rates below zero (a history of negative rates here; see these briefings at VOX and Bloomberg View).
A second and more powerful stimulus comes from government spending — directly employing workers and fixing America’s rotting vital infrastructure. But how to pay for it? Raising taxes negates the stimulus. Borrowing raises the government’s already high debt ratios, just as the boomers’ retirements begin to boost it — which will continue for several decades.
Japan has tested a third way on a large scale: the government issues bonds which the central bank buys. It’s called monetizing the debt and was long feared as inflationary. Japan ran its net debt to 140% of GDP as its fiscal deficit accelerated to fantastic heights (one of the three arrows of “Abenomics”) — but its debt now shrinks as the central bank’s purchases of 80 trillion yen/year (US$658.7B) exceeds the government’s new debt issues of ~50 trillion yen. With the economy growing (albeit slowly), debt/GDP falls. It might drop by half during the next few years, with no undesired inflation. See this for more analysis.
Fourth, the Fed can buy corporate debt, mortgages, and even stocks. They did the first after the crash, and the second on a large scale during QE3 (Bernanke foreshadowed this in his famous 2002 “we have a printing press” speech). The Bank of Japan has bought stocks on a large scale. It always gets applause.
Should a recession loom again — that would be the third slowdown since the crash — the government almost certainly will use these tools. Lines have been crossed, and we cannot go back to the old world. If done with sufficient size such measures will boost the economy. They appear to have few short-term ill effects. We’ll be guinea pigs testing their long-term effects.
One pleasant side-effect is that use of these tools probably will send risk market prices to even higher levels, as markets have long since abandoned any connection to valuations — trading instead on Fed policy. Art or stocks, they are all just trading cards to the speculators that run our markets today. History suggests that this bubble will end badly, with unknowable effects on the economy.
(5) For More Information.
See all posts about economics. If you liked this post, like us on Facebook and follow us on Twitter. Also see these recent posts about this cycle:
- Dreams of a boom fade & attention turns to secular stagnation.
- How close are we to the next recession? — More indicators.
- Status report on the US economy: darkening sky, rough waves ahead.
- Highlights of the jobs report, the good news & the bad.
- New economic data only deepens the mystery.
Perhaps a better world lies ahead
