Recessionary Forces at Play in the United States

September 27, 2011

In the see-sawing ride of world share prices, this week has seen impressive and welcome upward movement following last week’s significant downsizing.  Optimism that a workable resolution of the European debt crisis has been the catalyst, although the basis for that optimism remains very fragile.

The other critical problem for the world economy is the possibility of a new U.S. recession.  Real GDP growth slowed from 3.3% in the year to 2Q10 to 1.5% in the following year to the second quarter of 2011.  More worrisome, the U.S. economy expanded at a mere 0.7% annualized rate in the first half of 2011.  At a glance, that looks dangerously close to stall speed.  On more rigorous examination of U.S. business cycles since 1970, the avoidance of a recession after a two-quarter growth rate under 0.8% would be unprecedented.  There were only three instances when GDP grew less than 1.0% and not associated with an economic downturn in the last forty years.

  • GDP advanced 0.9% annualized between 4Q94 and 2Q95.  Growth slowed abruptly in response to a doubling of the federal funds rate from February 1994 to February 1995, and long-term rates shot up as well.  In the second half of 1995, however, growth revved back up to 3.1%, and no recession occurred.
  • GDP also advanced 0.9% between 3Q02 and 1Q03.  A recession had ended just previously, and unemployment was still cresting.  This was the period when the Fed eased to avert deflation, and growth responded, accelerating to 5.1% annualized between 1Q03 and 3Q03.
  • Real GDP increased merely 0.8% between 1Q06 and 3Q06.  Asset bubbles were poised for a gigantic bust, and the Great Recession began eventually in December 2007.  Unlike the first two cited examples, growth in the two quarters following 3Q06 remained very low at 1.6% annualized.  The likelihood of sub-2% growth in the second half of 2011 seems considerably greater than of getting more than 3%, let along a pace exceeding 4%.

U.S. data released since the Fed unveiled Operation Twist on September 21 do not change the U.S. economic profile materially.  Although not depicting recession per se, such are consistent with no more very mediocre continuing economic growth.  The 0.3% rise in the U.S. index of leading economic indicators in August was half as much as July’s increase.  The FHFA house price index rose 0.8% in July but was still 18.4% lower than in April 2007.  The Case-Shiller house price index held steady versus on a seasonally adjusted basis but was again more than 4.0% lower than a year earlier.  The pause in foreclosure likely helped both of these indices stabilize, but a pickup in evictions threatens.  New home sales in August were at a six-month low, while existing home sales last month were 2.4% lower than their average level in 2009.

New U.S. jobless insurance claims averaged 421K in the latest four weeks to September 17 versus a pace of 407K in the previous four weeks and 391K some six months earlier during the eight weeks to April 2.  It is common in recessions for this proxy for laid off workers to rise from less than 400K per week to a level that is clearly above that threshold. 

The Chicago Fed National Activity Index slumped back to a reading of minus 0.43 in August after rising by 0.46 points to 0.02 in July.  The Richmond Fed Manufacturing Index printed in September at minus 6.0 and posted an average score of minus 5.7 this quarter compared to a mean reading of +2.3 in 2Q11.  The Richmond Fed Services Index fell three points further to minus 4 in September and averaged 0.7 in the quarter versus +6.0 in 2Q.  Even in Texas which has outperformed the rest of the United States in some key respects, the Dallas Fed manufacturing index of +5.9 in September was still lower than readings in April, May and July, and the average index of 5.9 in 3Q was 2.9 points below the average second-quarter score.

The Conference Board consumer sentiment survey this month produced an overall reading of 45.4 after 45.2 in August.  While expectations improved 1.6 points, present conditions deteriorated this month by 1.8 points to a mere 32.5.  Consumer sentiment averaged 49.9 in the third quarter, down from 61.6 in 2Q and 66.3 in 1Q.  The funk that engulfs households is reflected in the latest weekly chain store sales figures as well.  On-year growth in the ICSC gauge was the lowest since February.

A very scary aspect of the thought that the United States might soon slide back into recession is the current 9.1% rate of unemployment.  In the first month of the 1973-75 recession, joblessness stood at 4.8%, and it was at 6.3% in January 1980, the first month of the double-dip downturn of the Carter/Reagan era.  Prior to the Great Recession, those had been America’s severest post-war downturns.  Unemployment at the beginning of the Great Recession was only 5.0%.  When that recession heated up in the third quarter of 2008, I predicted that unemployment would crest at a new post-war high, breaking the 10.8% mark set in 4Q82.  That didn’t quite happen but remains quite possible if a new recession ensues.  In previous recessions, macroeconomic policy turned stimulative and held a key to righting the economy’s trajectory.  This time the private sector will be on its own, fighting fiscal restraint and the self-feeding momentum that recessions naturally acquire once they are under way.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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