Are We Headed For Another Recession?

The Bureau of Economic Analysis (BEA) released their preliminary report on economic activity on Friday, July 29th and it was expectedly dim at 1.3%.  Typically, we want to see economic growth of at least 3% and this is far short of that figure.  What was surprising was their revision of 1st quarter economic growth, which was much lower than expected with revised estimates tracking actual economic growth of an anemic 0.4%, instead of the previously reported 1.9%.  Given recent disappointing job numbers and uncertainty regarding our U.S. fiscal picture, it is not surprising that economic activity wasn’t bustling during the months between April and June, but new developments suggest that a double-dip recession is very possible now.

U.S. economic activity is measured by four components:  personal consumption expenditures (consumer spending), gross private domestic investment (business investment), net exports of goods and services, and government consumption expenditures and gross investment (government spending). 

As for the large downgrade of first quarter economic activity, the main reason involved the BEA seriously underestimating business investment.  Initially, it was believed that this component grew by 12.4%, but in actuality, it only grew by 3.8%.  It is extremely difficult to accurately track the millions of transactions that take place in our multi-trillion economy, but it is disappointing to see such a drastically different figure. 

Consumer spending represents the largest portion of economic activity and it was very low at 0.1%.  This suggests that individuals were hesitant in opening their wallets due to concern over the economy.  While net exports was high, I believe most of that was due to declining imports as American consumers curtailed their spending habits.

As for business investment, there was improvement across the board in 2nd quarter.  This figure is often volatile from quarter to quarter, so economists do not place as much emphasis on this data on a quarter-to-quarter basis.  If there is a consistent period of decline or improvement over multiple quarters, then more formative conclusions can be made there.

Government spending continues to decline, but it was at a much slower pace than the previous quarter.  Particularly, state and local spending has contracted at high rates due to rising budget deficit problems.  Since many states face constitutional requirements to balance their budgets, they do not have the same flexibility as the federal government to maintain spending levels when the economy declines.  Federal spending actually increased by 2.2%, but that was due to boosts in national defense spending.  Nondefense spending has declined for two consecutive quarters and at a faster rate this quarter. 

Any resolution to the debt ceiling will almost certainly involve cutting government expenditures at the federal level.  Unless negotiations involve stalling meaningful cuts into the future, one would expect further decline in government spending.

While most economists initially believed that a double-dip recession would not occur, this latest data suggest that could be a reality, especially if the debt ceiling is not raised.  Weakening labor markets, sluggish consumer spending, and declining real estate prices are a recipe for a recession.  Let’s hope the trend changes soon.


2 thoughts on “Are We Headed For Another Recession?

  1. In September of 2007, I wrote that the bailout plans would not work, because there was no money in them. Fiat currencvies have a life expectancy of about 40 years. The Federal Reserve note is running out of time. If anyone is waiting for a recovery, they are the hindmost. The Hounds of Hell are nipping at their heels. I don’t know if there are any new ways to describe the situation. The best advice I can give is grow your own food.

    • For others, fiat currency means that it is accepted for medium of exchange based on the government’s ability to back it alone. Previously, U.S. currency was backed by the gold commodity until 1971. That meant that every dollar in circulation could be redeemed by the U.S. government with gold. Obviously, a promise (issuing a U.S. Bond) is easier to issue than one where each bill printed must be backed by some commodity, such as gold, silver or another natural resource. That makes it easier for governments to engage in reckless spending habits and incur large deficits, such as the U.S. A promise is infinite, while gold or any other commodity is finite. Fiat currencies provide more flexibility (or irresponsible actions, depending on how you look at it) for governments to manage large fiscal deficits where tax revenues are insufficient in meeting government spending obligations. Having said all that, I’m not as pessimistic as Georgesblog360 and believe that fiat currencies will continue to thrive into the near future. I say this because the U.S. continues to be a $14 trillion annual enterprise and that’s sufficient to service our current debt which is slightly higher than that. We don’t need to pay off the principal, but only the interest payments of bondholders. Having said that, I think it’s naive to think that we can continue to escalate our indebtedness without reforming our ways in Congress. We do need to prioritize our spending targets and make tough decisions on programs that are useful to society. We simply lack the capacity to fund future entitlement programs through tax revenues alone. However, I do believe there are opportunities to grow tax revenue at higher rates through tax reform where limit the number of deductions and tax credits enjoyed by all Americans, not just the rich.

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