Economists Starting To Warn About A New Recession
Confronted with disappointing data from around the World, economists are now talking about a new recession.
A growing number of prominent economists and analysts are saying that China’s slowing could tip the world and the United States along with it into recession within the next 2 years.
The fear and uncertainty is showing up in the recent swings in financial markets, rare outside of broader economic downturns.
The pace of US job growth has slowed compared to last year. And though the economic expansion has never reached many workers, it has actually lasted longer than the post-war average.
“The global economy is uncomfortably close to the edge,” said David Stockton, senior fellow at the Peterson Institute for International Economics.
And in these final months of the year a potential minefield for the US recovery looms.
The Congress must raise the nation’s borrowing limit before 3 November to avert a default. Lawmakers also need to approve the budget for the federal government or face a shutdown.
A wrong move by the Fed as it weighs whether to raise interest rates this year could hobble the economy’s anemic momentum.
Most analysts believe the most likely scenario is that the country continues to chug along, as Congress reaches an 11th-hour compromise, the nation’s central bank maintains its balancing act, and the US recovery is dampened, but not derailed by international turmoil.
Currently, estimates of US economic growth are around a 1% annual rate, and though expectations for next year have been repeatedly lowered, they remain positive.
But economists say that those forecasts are particularly murky now.
China last week reported its economy grew at a 6.9% annual rate over the past three months. That’s far faster than US performance, but still the slowest pace since Y 2009 and off of the government’s target of 7%.
Many analysts believe the official Chinese numbers are too rosy.
Some outside economists believe the country’s growth rate may be as low as 3%, and that uncertainty makes forecasting precarious.
“Economics isn’t rocket science, and even rockets frequently land in the wrong place or explode in mid-air,” wrote Willem Buiter, chief global economist at Citigroup, who assigned a 55% chance of a moderate to severe global contraction next year.
Since World War II, recessions have occurred an average of every 5 years.
The current expansion is more than 6 years old, beginning in July 2009. A recession is generally defined as 2 consecutive Quarters of contraction, but an official designation is often not made until long after the decline has already begun.
The Great Recession started in December 2007 but was not officially diagnosed until a year later after the DJIA had already fallen about 40% and more than 3.5 -M workers had lost their jobs.
A common refrain in economics is that expansions do not die of old age. Rather they are victims of policy decisions, such as the Fed interest rate hikes in the early 1980’s to tame double-digit inflation, or of unexpected shocks, such as the implosion of the subprime mortgage industry.
But the Spring of Y 2001 may be a more useful comparison.
The country faced weak growth abroad and the fallout of the dot-com bubble, but only 15% of economists surveyed that Summer believed a downturn had begun.
Yet the nation was in the midst of a recession that lasted 9 months. The downturn was relatively shallow, and in the aftermath of the 9/11 terrorist attacks, then-President George W. Bush quickly proposed a stimulus package that delivered tax rebates to every household.
The Big Q: How damaging would a recession be if it happened?
The Big A: Most economists, including believe the next recession will likely be mild.
The problem is that the nation’s top policymakers may have less power to combat it. If anything, analysts worry that it will be officials in Washington who inadvertently send the economy over the edge.
The backstop during the last financial crisis was the Fed. The nation’s central bank slashed its Key interest rate to Zero+ in December 2008 and has pumped trillions of dollars into the economy, and 7 years later, rates are still at Zero+ and the Fed has maintained a $4.5-T balance sheet.
In other words, most of the central bank’s ammo is spent. For many Americans, the difference between recovery and recession is hazy.
The nation’s labor force has shrunk to the lowest mark since the 1970’s, largely because many people have given up looking for work. Those working part-time even though they would prefer full-time jobs remain well above the pre-recession level.
And most importantly, wage growth is stuck at about a 2% despite a drop in the unemployment rate and a pickup in hiring.
The recession chatter gets louder.
Have a terrific week.
HeffX-LTN
Paul Ebeling
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