Summary: The Economic Cycle Research Institute (ECRI), who correctly predicted the slow recovery, looks at the multi-year slowing in the economies of the developed nations — its causes (the world is becoming Japan) and likely consequences.
ECRI, 20 June 2016.
Reposted with their generous permission.
The risk of a global recession is edging up, as the global slowdown we first noted last fall continues (ICO Essentials, September 2015). This danger is heightened because longer-term trend growth is slowing in every Group of Seven (G7) economy, as dictated by simple math: growth in output per hour, i.e., labor productivity – plus growth in the potential labor force – a proxy for hours worked – adding up to real GDP growth.
As we laid out over a year ago (USCO Essentials, June 2015), this simple combination of productivity and demographic trends reveals that U.S. trend GDP growth is converging toward 1%. This is reminiscent of Japan during its “lost decades,” where average annual real GDP growth registered just ¾%, which is why we have cautioned that the U.S. is “becoming Japan” (USCO Essentials, February 2016) and (ICO, July 2013).
Expanding this analysis to the rest of the G7, we find that every economy is effectively becoming Japan, and the sharpest slowdowns are happening outside North America. Thus, as trend growth falls in the world’s largest advanced economies amid the ongoing global slowdown, the threat of a global recession is growing.
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.
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).
Summary: First, the good news: the May number was awful but probably noise. Then the bad news: job growth is slowing fast. It’s the among last economic metrics to roll over, suggesting that we’re sliding to a recession somewhere ahead of us. But the US is not a “Starbucks Economy”; real wage growth is normal. This is the second of two posts today; see Immigration to the US surges. It’s good news for Trump!
The good news about the bad news:
May’s job growth was ugly, but might just be noise
Note the other bum months amidst the otherwise steady growth
Graph of the monthly change in jobs since Jan 2013
Employment is still growing, but slowing fast
Graph of the year-over-year percentage growth in jobs