Is the U.S. Economy Heading Toward Another Recession?

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Economic growth has taken a sharp turn downward during the first quarter of 2014. Image courtesy of whitehouse.gov

Economic growth has taken a sharp turn downward during the first quarter of 2014. Image courtesy of whitehouse.gov

Recession is when a neighbor loses his job. Depression is when you lose yours — Ronald Reagan

Most of us shudder at the memory of the so-called “Great Recession”, the longest downturn of the American economy in nearly 70 years. Economists determined the beginning of that recession to be December, 2007, with the end occurring in June, 2009 — 18 months later.

During that period, and in the immediate aftermath, the housing market dropped nearly 30% nationwide. The U.S. economy lost 8.8 million jobs. The nation’s Gross Domestic Product fell a sharp 4.7% before posting stubborn, sub-normal growth ever since. The nation’s financial system was nearly forced to its knees.

In summary, trillions of dollars of wealth were wiped out, with the upper 10% of income-earners seeing faster recoveries than the bottom 90%.

Years later, we’re still seeing the after-effects of the huge decline throughout the economy.

The U.S. Economy Has Been in Recovery for Five Years

Although a recent NBC News/Wall Street Journal Poll indicated that 57% of Americans believe the U.S. is still in recession, the facts show otherwise.

The economy has grown at an average annual rate of slightly less than 3% since the end of the last recession, about a half point below the post-WWII overall average and nearly 2% below the normal post-recessionary recovery period. As a result of the slow growth, personal income has nearly stagnated, up just 2.6% nationwide in 2013, nominally ahead of the 1.1% inflation rate.

Without question, the lack of meaningful personal income growth is a major contributing factor in the poll results. However, the bigger question is this: With business cycles rising and falling in semi-predictable patterns, and growth appearing to slow down even further of late, is the economy headed toward another recession?

The Business Cycle

Investopedia defines the business cycle as follows:

The fluctuations in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. During expansions, the economy is growing in real terms (i.e. excluding inflation), as evidenced by increases in indicators like employment, industrial production, sales and personal incomes. During recessions, the economy is contracting, as measured by decreases in the above indicators. Expansion is measured from the trough (or bottom) of the previous business cycle to the peak of the current cycle, while recession is measured from the peak to the trough. In the United States, the National Bureau of Economic Research (NBER) determines the official dates for business cycles.

 The business cycle is represented as essentially a Bell Curve, with the left side representing a growth period, the apex being the economic peak and the right side a period of decline.  Below is the typical representation:

The Business Cycle. Credit: :Bernard Ladenthin

The Business Cycle. Credit: Bernard Ladenthin

Note that the cycle technically includes depressions, although the U.S. has not experienced one since the end of the Great Depression in 1941. Until Keynesian Economics and aggressive monetary policy became the tactics of choice to combat downturns, depressions occurred approximately every 25 years in the United States.

Although business cycles look perfectly symmetrical when drawn on a chalkboard, they are anything but that in real life. The difficulty is not only in forecasting when one phase is about to end, but in seeing where another has already begun. In most instances, there is a lag effect of six months or more before the trickling stream of data confirms one or the other.

Are We Entering into Another Recession?

With the Commerce Department announcing a revised -1% annualized GDP decline for the first quarter of 2014 in May, there is a real possibility that after five years, the economy is poised to lapse into another recession. After all, there have been 22 periods of economic contraction in the U.S. since 1900, or roughly one every five years. As stated above, the feeble recovery from the Great Recession is five years old this month.

Most economists don’t believe so – they blame the rough winter, along with a decline in business investment and a widening trade gap for the negative quarter, and don’t expect it to continue. “We knew that weather dramatically impacted growth in the first quarter, and we fully expect a bounce back in the second quarter,” explained Dan Greenhaus, chief strategist at BTIG.

Economic Predictions for the U.S. – Strong Growth

In fact, the consensus forecasts are for the United States to experience growth in excess of 3% for the remainder of the year. Consumer spending should see substantial improvement, as business payrolls are expanding and unemployment filings down to a seven-year low. If the lurching between one political crisis and another is over, it’s quite possible the economy will finally gain a measure of traction not seen in years.

That is, unless the politicians screw things up yet again. As Mark Twain once said, “Suppose you were an idiot, and suppose you were a member of Congress. But I repeat myself.”

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