Recession Watch: Less Room to Fall

  • The U.S. economy barely dodges a bullet, and avoids a back-to-back recession. But that is cold comfort to the millions of unemployed and under-employed workers caught up in a still-wounded labor market. It is also only a faint ray of hope for ailing housing markets across the country. This is an expanding economy, but it is not yet a recovering economy for millions of U.S. households.
  • Economic indicators over the last month have scarcely moved the recession dial.  We remain uncomfortably close to a 50 percent probability of recession by the end of 2012. Job growth since May has been weak. Residential real estate markets remain depressed in many parts of the country. Consumer confidence was shattered in August and barely improved in September. Prospective policy actions look like the half-measures that have brought us to the brink of recession. The saving grace of the economy may be the fact that many of the excesses that led to the “Great Recession” of 2008/09 have been wrung out of the system. There is simply less room to fall now then there was in 2007.  House prices are now cheap relative to incomes. U.S. financial markets have withstood a real world stress test. Manufacturing payrolls are not swollen with underutilized workers. Construction activity is already at a minimum. Business inventories do not need to be purged. Inflation is not running rampant. Oil prices are not elevated.
  • What then would a new recession look like? If we do start to slip, the GDP profile would look more like 2001 than 2008/09. Recall in 2001 we did not have consecutive quarters of declining real GDP. The two quarters of negative GDP growth that we did have in 2001 (Q1 and Q3) were only shallow declines of 1.3 percent and 1.1 percent respectively. Indeed, for the first two quarters of 2011 we have had real GDP growth of only 0.4 percent and 1.0 percent, well within the grip of a negative data revision. To pull a negative GDP quarter soon we would need consumer spending  to  sag just a little, under the weight of stubbornly high unemployment and very low consumer confidence. Added to weak consumer spending, business investment could falter as evidence of a euro-zone recession mounts. Government spending could also be more of a drag in the absence of new stimulus.  In short, it would not take a lot for GDP to stall or shrink a little.
  • What would prevent a new recession? A stock market rally through the fall would be a nice place to start. Add in some more job growth and consumer confidence begins to repair. Pent-up demand is unleashed. Businesses begin to deploy their vaults of cash. Oil prices remain low. Real estate markets begin to feel firmer.

Monthyl National, October

Click here for the October U.S. Economic Update, with complete commentary, charts, and an expanded forecast table: USEconomicUpdate1011

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