The mystery of the US economy at stall speed

Summary: Since 2012 the idea of a “stall speed” to the economy played a prominent role the almost incessant predictions of an imminent recession. Since then the US has cruised at or below stall speed without a downturn. This is rich with lessons for us — about the danger of believing untested theories, about overconfident forecasts, and the big one: That we’re indeed living in the transition from the post-WWII era to a different economic regime. Much that we relied upon no longer works; we need to find the rules that govern this new world.

Forecasting recessions, the key to managing the economy.

Forecasting with models

In April 2011 Fed economist Jeremy J. Nalewaik published “Forecasting Recessions Using Stall Speeds”, showing that the economy tends to slow at the end of expansions before falling into a recession, that gross domestic income (GDI) provides a better measure of output growth than gross domestic product (GDP, the other side of the ledger), that these stalls are more visible in GDI than GDP, and that two quarters of GDI real growth below 2% (seasonally-adjusted annual rate, SAAR) “could serve as a moderately useful warning sign that the economy is in danger of falling into recession.”

The concept of stall speed is intuitively appealing. Like an airplane, if the economy slows too much it no longer generates enough life to overcome gravity (the drag of interest on its debt). I have often used the concept. This idea caught people’s imaginations, playing a big role in the almost monthly predictions by bears since 2012 of a recession really soon: from “Economy Close to Stall Speed May Signal Renewed U.S. Recession” (Peter Coy at Bloomberg, August 2011) to “The Global Economy’s At Stall Speed, Rapidly Loosing Lift” (David Stockman, May 2, 2016).

The data shows that this predictive tool worked until the 2008 crash, but no longer. As this graph from the Economic Cycle Research Institute (ECRI) shows, this measure has been below 2% in 10 of the past 14 quarters — but no recession yet (the Atlanta Fed’s GDPnow model predicts 2.8% growth in Q2 GDP, similar to the Blue Chip consensus).

“In fact, the GDI-based “stall-speed” metric has averaged just under 2% since mid-2012. Yet, there has been no recession, suggesting that the “stall speed” concept was flawed to begin with.”

ECRI graph of GDI and recessions


Since early 2007 I’ve written many posts showing that the post-WWII era has ended. The debt supercycle, evolution from a bipolar to a multi-polar world, the long war, demographic change, the new industrial revolution, and other changes upset the once-reliable concepts through which we see the world. The business cycle “clock”, the indicators we use to measure it, our expectation that cycles end with rising inflation and Fed rate increases — all of these need revision or replacement.

Somewhere in the past three decades future historians will draw an arbitrary line and declare the end of the post-WWII era. These historians will circle a date in our future and declare that the beginning of the new era.

We live in the transitional era, and we know what these are like. The Old World ran from 1648 to 1776. After a transition from 1776-1815, the New World ran to 1914. Another transitional period, unusually painful, ran from 1914 – 1950. Now a new one begins. In economics it means persistent slow economic growth, zero and negative interest rates, low inflation with bouts of debt deflation, etc — the oddities don’t stop coming.

I advise caution about forecasts, especially the ones that dominate the headlines — the highly specific ones made with awesome confidence. They’re probably wrong. A key to understanding the news: the unexpected rules in our age of wonders. Here are some of my guesses about the future (from 2012 but still looks good).


“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”
— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia.

For More Information

There are economists skeptical of the “stall speed” concept, such as “Does US GDP stall?” by Wai -Yip Alex Ho and James Yetma, BIS paper, September 2012. They published a similar analysis using international data in March 2013.

If you liked this post, like us on Facebook and follow us on Twitter. See all posts about economic growth, about secular stagnation, and especially these…

  1. Poorly prepared Boomers retiring means hard times for them and for America.
  2. The Fed sees years of slowing growth. Prepare for years of political turmoil.
  3. As boomers retire they create a drag on US GDP that will last for decades.
  4. Why the Fed is excited about US growth. Why they’re wrong.
  5. May’s job report shows the beginning of the end for the recovery.

Two books about our slow-grow economy

Are we Doomed to Secular Stagnation? Limitations of Supply-Side Economic Policies by Uwe Petersen (2014) and the highly rated Secular Stagnation: Facts, Causes and Cures by editors Richard Baldwin and Coen Teulings (2014).

Are we Doomed to Secular Stagnation?
Available at Amazon.
Secular Stagnation: Facts, Causes and Cures
Available at Amazon.

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