Close

This page had been redirected to a new URL, please update any bookmarks.

Font Size: A A A

macroblog

« Lots of ground to cover | Main | The GDP revisions: What changed? »

August 01, 2011

Is the economy hitting stall speed?

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.

David Altig By Dave Altig, senior vice president and research director, and



Mike Bryan Mike Bryan, vice president and senior economist, both of the Atlanta Fed

August 1, 2011 in Business Cycles, Data Releases, Economic Growth and Development, Employment | Permalink

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c834f53ef0154342cd622970c

Listed below are links to blogs that reference Is the economy hitting stall speed?:

Comments

I think a problem with the US economy these days is the amount of debt and leverage involved in all markets. Even if you're not highly leveraged yourself, you can bet most of the other market participants will be, and that makes for an unstable investment (through no fault of your own) when the global economy has another dip and all asset classes get the jitters.

My biggest fear as an investor right now would be China. A drop in Chinese asset values would not only shake confidence in China's economic vitality, but it would also open debate about whether or not the global economy is over-leveraged and over-reliant on the success of China (it is).

Excessive leverage is partly what made the property bubble aftermath so devastating for Japan, America and Ireland. There's a lot of talk about the Chinese economic bubble and it's potential impact on the global economy. Several months ago, so-called Chinese 'expert' Nick Lardy dismissed worries about what he called the "so-called property bubble" - this was during a conference held at Peterson Institute in DC. However, he now concedes that says a real estate downturn may cause a significant in China, and this is an opinion shared by many other mainstream economic analysts.......

So what changed his opinion? I would suggest a dawning realisation that most of the massive Chinese stimulus, lending and spending during 2009/10 just ended up in property purchases, which drove real estate prices in an alarming and totally unsustainable manner. Also, a realisation that China's economic system frequently produces bubbles, and that's not very likely to change in the near future!!

To understand why excessive debt and leverage is going to have a hugely negative impact on all asset classes going forward, read up on some of the work by Professor Steve Keen (see http://australianpropertyforum.com/blog/main/3567572 ). He's the Australian guy who predicted the GFC, and he has also shown that unsustainable debt to GDP ratios in a country (which you definitely have in the USA, and we have in Australia too) will always result in deflation or depression.

Charles B.

Posted by: Charles Bandridge | August 02, 2011 at 08:26 PM

Hi Dave & Mike, I pop in occasionally but haven't felt the need to kibitz, but I'm lost over what the FED has left in its bag. But first, the working world, at least those in the private sector are way beyond needing to know why "excessive debt & leverage is going to have a hugely negative impact on them". They've been living it for five years, since their spiggots were closed.
My question is, has the FED been largely rendered helpless to turn the mess around that it was so much involved in creating? I'll be the first to admit, I don't know a lot (although I spent many months barking warnings of the impending mortgage implosion), but my guesses are: a QE3 will be toothless & the housing bear market has years to go. So, what's left to encourage Banks to lend & buyers to borrow?

Posted by: bailey | August 10, 2011 at 10:30 PM

Let me toss out what the FED can do to encourage Banks to lend - make it more costly for them NOT to lend. Unfortunately, that raises a better question - if the FED works for the Banks, is it really in its best interest to act to constrain Banks profit?
So, maybe the question is best left to Congress? Oops, isn't that what got us here.

Posted by: bailey | August 14, 2011 at 08:42 AM

Understanding that when all you have is a hammer, everything looks like a nail, I still find it mystifying how monetary policy can be expected to alter business fundamentals by anyone with an ounce of sense, except in illusory ways such as via inflation.

I've never seen an answer to the question whether the US economy can grow at what is considered "reasonable" rates without the aid of a housing bubble, an internet bubble, a finance bubble, or some new kind of bubble, when US wages are being driven down by globalization and costs of production are being driven up by global growth in oil consumption. Unless we can accelerate conversion to natural gas and ultimately renewable energy, this contraction seems likely to last for a long time.

Posted by: George McKee | August 14, 2011 at 07:21 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in