The news that the U.S. economy is not only growing slowly but has grown more slowly than anyone even knew has justifiably rattled some nerves. The sentiment is captured well enough by this article from Bloomberg:
“The world’s largest economy has yet to regain the ground it lost during the recession and may be vulnerable to a relapse.
“Gross domestic product [GDP] expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, Commerce Department figures showed yesterday. Economists said the slowdown leaves the recovery susceptible to being knocked off course by shocks at home or abroad.”
At Reuters, James Pethokoukis makes those concerns quantitative:
“…we’re in the danger zone for another recession. Research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2 percent, recession follows within a year 48 percent of the time. (And when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time.”)
The research being referred to is work done by the Federal Reserve Board’s Jeremy Nalewaik, a careful researcher who is clear that the results should be read with, well, care.
“The dynamics at play in the early part of the 1990s and 2000s expansions may have been different than the dynamics at play in the more-mature part of those and other expansions, and our stall speed models may have omitted an additional phase of the business cycle that has appeared in recent decades, namely the sluggish, jobless recovery phase. If so, the applicability of these stall speed models may be somewhat limited at certain times, such as in the middle of 2010 when the economy evidently slowed while still in the early stages of recovery from the 2007-9 recession.”
With caveats like that in mind, Dennis Lockhart, the president of the Atlanta Fed, counseled patience in a speech he delivered on Friday:
“My staff and I have recently been pondering the following questions: Are we experiencing a temporary slowdown—a soft patch—on a recovery path that should return to a rate of 3 to 4 percent GDP growth? Or, instead, are we dealing with an inherently slower pace of economic growth that, because of some combination of persistent economic headwinds and deeper structural adjustment requirements, has the potential to be of much longer duration and more intractable?”
Lockhart said his base case forecast is in line with the greater-strength view.
“I am expecting greater strength in the second half of 2011 and into 2012, accompanied by inflation numbers that converge to around 2 percent. But, as I said, I don’t dismiss the possibility that we’re in the alternative, more problematic world I described of low and slow growth improving only very gradually. At this juncture, I think we have to wait and see what the incoming data indicate…
“But to try to put some time limit on indecision, I think a continuing flow of weak numbers through the third quarter and into the fourth will call for a serious reconsideration of the situation. The weight of cumulative data could point to a different order of problem—that is, different than just a passing slowdown—if indicators show continued weakness much past year’s end.”
Of course, Nalewaik’s research shows that things could become considerably less comfortable if the 2 percent threshold persists, or the yield curve flattens, or the housing market tanks again. At that point, history is on the side of the recessionists. While Lockhart and our Reserve Bank don’t believe we’re there yet, it’s fair to say we’d feel more comfortable if the incoming third quarter data were a little more positive. And on that count, this morning’s Institute for Supply Management report for manufacturing isn’t a very promising first step.
This post originally appeared at macroblog and is reproduced here with permission.
2 Responses to “Is the Economy Hitting Stall Speed?”
As the tepid economic "recovery" fizzles to a stall and an ideological civil war rages in Washington, millions and millions of otherwise hard-working Americans wonder if they will ever be employed again. Clearly, we need a jobs solution NOW! I have a plan to restore the U.S. economy to full employment. It's a complex private-sector mechanism that involves giving another dose of financial nitroglycerin to Wall Street hoping that this time they won't nuke the economy. In exchange, we get lots and lots of jobs.
Read the plan here: http://jpbulko.newsvine.com
It should be abundantly clear by now that we cannot rely on government to do the right thing to steer the economy back into good health. We are living in a Friedmanite-Randian epoch and we must act accordingly (no matter how Machiavellian that might seem). What we need is a private-sector solution to the high unemployment problem, one that uses the power of capitalism and free enterprise (and not whining about the government's inaction).
Read the proposal here: http://jpbulko.newsvine.com
Joseph Patrick Bulko, MBA
Why is there even a debate?
It's the overall indebtedness.
This time it really is different than any of those other times. Overall debt has never been this high in the history of mankind as far as I know. Maybe in some small country but certainly not in the US nor in the world.
When debt becomes this large, it sucks the life out of demand which sucks the life out of the producers and the only entitles that do well are those who create, service or benefit from debt. This is totally unsustainable and the ONLY answer is that the huge inverted pyramid of debt collapses. Unless the political system worked and the debt was somehow devalued across the board enough to allow new debt to be created… But we all know this isn't going to happen, especially after the spectacle we just witnessed in the US Congress.
So debt default and deflation are in the future. Kicking the can does nothing positive unless you believe that there is a political solution. I don't.