One joke about economists is that they have correctly forecast five of the last three recessions. But the team at the Economic Cycle Research Institute (ECRI) in New York City has predicted three of the last three recessions.
And now the ECRI has reaffirmed its call for a recession to begin in the U.S. this year. From its May 9 note:
For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession.
Back in late 2011, the ECRI warned of an imminent recession and stuck to its guns during the subsequent upswing in the stock market. The burst of optimism among investors was aided by upticks in the annualized growth numbers for output, employment and income. The problem with the data, however, was that they were inflated by out-of-whack seasonal-adjustment factors.
The less distorted (and less followed) year-over-year growth rates for output, personal income and consumption were meanwhile showing sluggish readings. Employment growth was strong in early 2012, but the job numbers were forecast to fade given consumption trends typically lead hiring. That weakness has now begun to show up in U.S. employment reports.
Why is there as yet no self-sustaining economic recovery despite three years of highly expansionary monetary policy? Running the printing press like never before has indeed produced a mountain of cash on bank balance sheets, but they aren't lending it out much to consumers and business.
One reason is that the U.S. Federal Reserve, concerned back in 2009 about the inflationary threat posed by printing vast quantities of money, began paying interest on banks' reserves deposited at the Fed. This risk-free return encourages the banks to keep a good chunk of their cash piles with the central bank, instead of lending it out.
ECRI expects the recession to begin mid-year and become apparent in official statistics this fall. By then, the Fed and other central banks should be ready for another round of "quantitative" stimulus. One feature could be the lowering, or elimination, of interest payments on reserves held at the Fed. Or perhaps we'll even see Ben Bernanke at the controls of a helicopter, tossing suitcases of freshly minted paper money onto American streets.