The head of ECRI announced today that the U.S. economy is guaranteed to be entering a new recession. (Video below the fold.)
Who is ECRI? They're a little different than the usual economists - they are independent (don't work for any big banks or institutions) but advise a lot of institutions, they are unemotional in their calls, and they use data on many variables - everything from consumer spending to industrial production to money supply. Their track record is actually pretty amazing. They've never mistakenly predicted a recession in the several decades they've been around as an economic research group.
What might have told us that we were entering a recession earlier? Let's look at that.
Here's this morning's video. (Sorry it's from CNBC - there are no better options I could find, though I did hear that he also did an interview with NPR, so if anyone can find that, I'll add it.)
The big news at the beginning of the month was that no new jobs were created in the past month:
Payrolls were unchanged last month, the weakest reading since September 2010, after an 85,000 gain in July that was less than initially estimated, Labor Department data showed today in Washington. The median forecast in a Bloomberg News survey called for a rise of 65,000.
At the time, the head of ECRI said that there's basically nothing Obama can do at this point to decrease unemployment before the election. I agree, unfortunately. These cycles are slow and have to play out:
We still have many unresolved long-term problems:
long-term stagnation of middle class incomes,
unemployment,
food prices,
life expectancy, etc. The best we can hope for is that during the recession these don't get worse. (Well, food prices will fall in nominal terms, but maybe not in purchasing-power terms.)
There may be something different about the recession we're entering. It may mark the beginning of a new phase for the U.S. economy, not because it's guaranteed to be a bad or good recession, but because we've reached some turning points.
That is, this recession was projected in advance - and was known late last year to those watching oil prices:
The price of oil moved above $90 a barrel yesterday. Is it time to become concerned about the possible macroeconomic effects? In the early part of this decade, consumers seemed to be largely ignoring oil prices, in part because energy expenditures had become a smaller part of their budget than they had been in the late 1970s. But as the price of oil rose over the decade, energy expenditures returned to a position of importance in consumer budgets. I'm persuaded that the oil price shock of 2007-2008 made a measurable contribution to the initial downturn of the Great Recession.
The problem is fundamental: oil is now the main bottleneck for our economy. (I'm not saying it's the only bottleneck, just the main one.) Stimulus only works to get a self-sustaining recovery going if there are resources for the economy to self-sustain. Given that oil production has been on a global plateau for 6 years (all the while, China and India are gobbling up more and more of it), even if we got the economy revved up again it would sputter from high oil prices. Drilling won't solve the problem either. While oil prices don't go only in one direction (they drop down when there's a recession), the long term trend is a steady rise in prices.
I've written more about how this fundamental dynamic means we're at the end of economic growth as we've known and measured it:
The graph, from this interesting post from Doug Short, shows inflation-adjusted GDP over time.
The crazy thing that almost nobody talks about is that this may be the first time in the history of modern U.S. economic statistics that a recovery has not gotten us back to the previous peak GDP (inflation adjusted). Given that we’re likely to have at least one if not two negative GDP quarters this year, that means that our recovery was only partial.
I should add a bit on how we might get ourselves out of this destructive cycle. The way to respond to this is to design programs that massively increase our energy efficiency and energy independence. These can be stimulus programs, so they’ll create jobs, but they have to be carefully crafted so that they don’t cause much of a rebound effect. Basically we need to decrease our oil-to-GDP ratio. Obama's American Jobs Act will help in the shorter term keep unemployment from spiking.