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posted on 01 July 2017

Will The USA See Another Big Recession?

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Is the Federal Reserve's monetary policy smoothing out the economy to such an extent that small relief recessions no longer occur? Will we only be faced with massive recessions in the future which have more momentum than monetary policy can overcome?


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The USA economy is about to begin its ninth year of expansion. It has two years to go to be the longest period of expansion in modern USA post-WW2 history. It also one of the weakest expansions, but at this point is much better than the annual 1.4 % growth seen in the Nov 2001 - Dec 2007 expansion.

It is difficult to forecast recessions. I spend a good portion of my day drilling through data - and I am not seeing any grouping of signs which signal an economic turning point. Even in the periods of strongest expansion, one can always find a single data point which historically foretells a recession. The economy does not work uniformly - there are always components going in the wrong direction. A recent tweet grabbed my attention:

This definitely is not a good data point. It is interesting to speculate on the cause of the low return of equity:

  • profit squeeze (such as the shakeout now occurring in retail from etailers such as Amazon)

  • low productivity growth

  • imports taking sales

  • too much capacity

  • is it simply that the stock markets are overpriced from a historical perspective (stock prices determine corporate equity)

Business is becoming less profitable, but remains historically strong.

A significant stock market correction could create a shock wave that would overcome monetary policy and put the next recession into motion.


Sidebar

As I do every week, I discussed this post with John Lounsbury and he thought it would be a good opportunity to introduce some basic background about Hyman Minsky. I'll quote a little of his comments:

This brings to mind Minsky's Instability Theory which states that the economy operates in a constant disequilibrium, going through periods of apparent stability followed by significant instability. Part of the theory states that the stability seems to become more entrenched just before it blows up.

Steve Keen has reduced Minsky's general theory to a specific model using data from the National Economic Accounts (NEA) tables and software adapted from engineering process flow analysis. He has shown that historically the model predicts past economic dislocations just before they happen. However, at this point, the model also gives false collapse signals so it is obviously still not complete. The model appears to show necessary conditions but not sufficient conditions for economic downturns.

Many economists do not recognize Steve Keen's work because it does not include the traditions associated with the assertion that economies tend toward equilibrium and return there whenever disturbed with the exception of exogenous shocks so great that equilibrium cannot be restored. These shocks are things that are unforseen and therefore no one can predict a recession, so goes the story.

Hyman Minsky (1919-1996) was one economist who did not buy the equilibrium hypothesis.


Other Economic News this Week:

The Econintersect Economic Index for July 2017 continues to forecast strengthening economic fundamentals - with the index showing normal growth for the third month in a row. Six-month employment growth forecast indicates modest improvement in the rate of growth.

Bankruptcies this Week from bankruptcydata.com: Privately-held TK Holdings (aka Japan's Takata - the airbag maker)

Weekly Economic Release Scorecard:

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