Another Recession by Early 2014?

August 2, 2013

The current post-crisis economic recovery, though punctuated so far by two "swoons" (growth scares in early 2011 and late 2012), has passed its 48th month. These past swoons notwithstanding, virtually no one is thinking of deflation or recession, even though second-quarter 2013 growth looks to be below 1 percent, perilously close to stall speed, says John H. Makin, a resident scholar at the American Enterprise Institute.

The past two post-swoon recoveries have not gotten the economy entirely back on track, but markets and, more notably, the Federal Reserve are betting on the third time being lucky. Instead of resting on this wishful thinking, Congress and the Fed need to start exploring measures that will prolong the expansion.

  • Many casual observers would argue that all is well with the U.S. economy. Consensus and the Fed are predicting robust 2.5 to 3 percent growth over an extended period with no deflation.
  • Housing is "back" and U.S. stocks are at record highs. The "bond bubble" has burst as investors sell bonds in the face of the rising interest rates that will inevitably accompany recovery.
  • The United States seems to be in the best economic position in the world.

Or so goes the consensus view. There is another possible scenario: Suppose the financial crisis and the Great Recession have returned the United States to a more normal sequence of business cycles. Suppose we are closer to the long-run (33 cycles between 1854 and 2009) average where expansions were shorter (about three years as opposed to the post-1961 average of  six years) and contractions a bit longer (18 months) than the 12-month contractions that are the post-1961, seven-cycle norm?

  • Economic indicators and long-term business cycle patterns suggest that the United States may be in another recession by early 2014.
  • Two post-financial crisis economic swoons have been curbed with easy money and fiscal stimulus, but flat retail sales, slowing employment growth and a faltering housing sector may prevent these strategies from working again.
  • To prolong the expansion, Congress and the Fed should enact near-term fiscal stimulus, lower tax rates and broaden the tax base, deregulate the financial sector, and focus on maintaining low and stable inflation.

Source: John H. Makin, "Third Time Unlucky: Recession in 2014?" American Enterprise Institute, July 30, 2013.

 

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