A 2015 US Recession is Now on the Table

Today, the question on the table changed from “Will there be a US recession in 2015?” to “Is the US in recession?” I’ve stated in this blog that the first quarter’s growth in GDP would likely be revised down to a recessionary number. That happened today.

The US government and most economists define a recession as a period of two consecutive quarters or longer of declining gross domestic product. Throughout the Great Recession, the government and the bulk of economists have been too optimistic in their projections and in their statements of statistical fact. More often than not, they have had to revise their numbers to worse figures than they first anticipated.

With the stated economic growth for the first quarter of 2015 being only 0.2%, it seemed likely that the tiniest revision would put us into negative territory, which mean a decline in GDP, not growth. Naturally, then, I said it was highly likely that the revised number would show that the US economy actually shrank in the first quarter of 2015, and so proved to be the case.

 

Are we now actually in a US recession?

 

A recession doesn’t officially start after the economy has been in decline for two consecutive quarters. Rather, a recession is declared retrospectively once we know the economy has been in decline for two quarters. So, if the second quarter comes in showing a decline in GDP, that would mean we are now already in a recession but just don’t have the numbers in yet to know it. That’s why I say the revised -0.7% change to GDP is recessionary. It doesn’t by itself put us in recession but can emerge into calculus that does add up to a US recession, depending on where we are now (which we don’t know).

The idea here is that a single quarter’s recess in economic activity could just be a fluke — bad weather keeping people out of stores and slowing transportation, oil prices causing temporary drops in fuel prices (a domestic product) or a drop in spending by those laid off, port closures slowing commerce. If, however, the economy declines for two quarters in a row, a half a year of retreat surely means there is something more systemic than just a fluke.

So, we may already be in an officially declared recession but just won’t realize it until it is officially declared. Then we will look back and say, “Yes, today was a day that was officially part of a US recession. So was all of the first quarter and all of the second.

 

Will the present quarter add up to a US recession?

 

No one knows, including me, but I would venture to guess that the present quarter will not turn out negative, but I’m certain it also won’t look good. There is bound to be a little rebound from the harsh winter in the upper Midwest and East Coast and the winter dock-workers strike. Housing starts have seen their best gain since 1999. And the government’s stats show that consumers banked a lot of their fuel savings over the harsh winter, which they might start to spend now that the threat of cold has abated.

However, the idea that was widely held by economists six months ago that we were in recovery that would continue throughout this year looks as doubtful as I said it would look six months ago. I think the US is more likely to teeter on the edge of recession until next fall before it goes off the cliff. We know we have been in recess, and the headwinds I started talking about a year ago have only grown worse. More importantly, none of our fundamental economic flaws has been corrected:

 

What are the flaws and forces that make a US recession or total economic collapse likely?

 

  • Almost no one has been jailed for the actions that put the world into global recession, which increases the “moral hazard” of history repeating itself. If you made out like a bandit, why not do it again?
  • Most of the banksters and brokers who destroyed the global economy are now paid more and have become much richer because of their misdeeds, while neither the Obama administration nor Congress seem to care.
  • The banks that were too big to fail are now twice as big, doubling the likely damage if banks do fail. (The government’s idiotic answer to the economic crisis was to force huge banks to merge.)
  • The disparity between rich and poor in the United States has increased, not decreased, since the Great Recession began.
  • Yet, the rich in the US still pay a smaller portion of their total income in taxes than the middle class because they make most of their money off capital gains, which are taxed lower and have more unique write-offs or credits.
  • Bank regulations have already been gutted of some of their important corrections.
  • Banks are still allowed to invest in the stock market, which was forbidden prior to the deregulation that allowed this mess (which is why the Federal Reserve, owned by the banks, is creating money for them to invest).
  • Banks still offer the trap of adjustable-rate mortgages, though fewer people are falling for it (probably because they can lock in good long-term rates right now).
  • Banks are creating more junky derivative mortgage-backed securities than ever.
  • The FHA has returned to enticing 3.5% down payments for subprime borrowers.
  • The jobs that were lost during the official part of the Great Recession (which is still reverberating throughout the world) have been replaced by lower-paying jobs with fewer hours and lower benefits or lower-paying contracts with no benefits, and most people fell off the unemployment count simply because they exhausted their benefits along with their will to look regularly for work, not because they found a replacement job.
  • The amount of global national debt is many times higher than it was at the start of the Great Recession.
  • The gross amount of global personal and business debt has increased enormously since the start of the Great Recession.
  • Student loans look perilously ready to collapse into mass default in the US.
  • Home foreclosures have started to rise again in the US.
  • Political unrest in the US is growing worse, as demonstrated in Ferguson, New York City, and now Baltimore, while the police have never felt so demoralized.
  • The stock market is a huge bubble created by Federal Reserve stimulus that is winding down, so next comes the unwinding of the stock market.
  • Most of the world’s largest economies are practicing quantitative easing just to stay alive, including China.
  • The Chinese stock market is ready for a melt-down and showing signs of failure at the top.
  • Europe still teeters in and out of recession in its various parts, and Greece is as perilous economically as it has been throughout this crisis. It could go over the cliff any day, and Europe is now more inclined to let that happen.
  • Most of the world’s central banks have exhausted their bag of tricks on trying to recover from the first part of the Great Recession, so they have no tricks left for the sequel.
  • The world is geopolitically more unstable than it was at start of the last US recession. Iran is once again asking for an extension in negotiations, which it will probably get … once again. The Middle East hasn’t looked this bad since the middle of WWI, and ISIS has now spread into Southeast Asia. The West appears to be back in a cold war with Russia, and China is heating up the South China Sea while North Korea continues to make advancements in its nuclear missile technology, claiming it can now reach the U.S. (and for the first time it appears likely that it can).

 

And that’s just the most obvious stuff.

Anyone want a mai tai?

3 Comments

  1. Ping from Knave_Dave:

    I’ve just been working on an article about Greece, China, and Puerto Rico, which I’ll publish shortly. I agree that the Fed and US govm’t will do all they can to prop things up, as will Europe as is China; but we are seeing Europe straining at the end of its willingness to prop up Greece. We are seeing China take extraordinary measures of essentially socializing their stock market and having very little success at stemming the flow of red ink.

    So, governments are clearly straining much more heavily now to kick the can down the road on the longstanding problems they have failed to resolve. I think we are going through some serious economic failures around the world right now and will see a cascade of events through the summer, and I suspect even the great government economic engines will find themselves struggling under more load than they can handle by this fall.

    There are plant of reason that global economic collapse could happen before the fall; but, as some you have heard have said, governments will do all they can to prop things up. That’s why I think things will roughly hold together until fall. By that time enough mini economic collapses will have happened around the world, staring with China, Greece and Portugal, that governments will reach the limits of damage-control. Clearly China and the Eurozone are very nearly there now.

  2. Ping from tjb323:

    What’s happening with Greece (and its affect on the UK), China and Puerto Rico (I think that is the place) with certainly add to the collapse. I often wonder how much the FED and the government will intervene to keep things afloat until the election in 2016? I don’t see how they can, but others I have talked to think that it could happen. Maybe just wishful thinking on their part. Very interesting times.

  3. Ping from Knave_Dave:

    Yet another indicator yesterday that the US is in or heading into a recession:

    “Fed officials SHARPLY DOWNGRADED THEIR ECONOMIC FORECAST FOR THIS YEAR. They projected the economy would grow between 1.8% and 2% this year,…. If they’re correct, annual growth would be the worst since 2011 and would be far from the breakout performance some economists had hoped for this year.” ( http://www.latimes.com/business/la-fi-federal-reserve-interest-rate-20150617-story.html )

    Looks like another year of predictions going to be right on or very close here at The Great Recession Blog.

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