Flying The Economy Close To Stall Speed

by: Steven Hansen


There is no indications in the data showing a recession is near.

Yet, historically, 2% GDP growth is a warning sign of an impending recession.

One needs to look at the detail in 1Q2014 GDP.

I am on record saying the data is forecasting a growing economy. I see NO evidence using any recession forecasting tools (or even the more recent new normal dynamics) which suggest a recession in the near term.

Yet, I continue to look at my conclusions as if they were wrong - and in any event, economic conclusions must always be considered suspect as the real knowledge base is closer to voodoo than science. Even so, there is little doubt that an economy which hovers at 2% or less (year-over-year and not headline growth) for long periods of time is ripe for a recession.

And that is where we are: Year-over-year real GDP growth in the USA has been hovering around 2% for the last year.

2Q2013 2.0%
3Q2013 1.7%
4Q2013 1.9%
1Q2014 2.1%

If one uses a four-quarter rolling average of year-over-year real GDP growth, it smoothes the lines out making any potential recession easier to spot.

Sounds easy to forecast a recession?? The problem is that GDP is a lagging indicator, any sort of real accuracy lags real time by months, and GDP is never fixed (it is called an estimated value because the estimate is always changed for years and years following the initial release). So what might be obvious about today when looking back using revised historical data is far from clear in real time - the GDP data is jumping around like Mexican jumping beans.

The headline 1Q2014 GDP contraction of 1.0% is misleading. The economic community likes to extrapolate each quarter of GDP as if it were a year of data. This approach creates quite a bit of noise and distortion caused by seasonal adjustment factors (which have not settled down since the Great Reset (aka Great Recession)). Although 1Q2014 GDP estimates were far from good, it is far from bad also if the data is analyzed in year-over-year fashion (see graph below):

And if one would look into the detail, 1Q2014 was not that bad. Even with the bad weather cited by some as the cause for weak growth - behind the bad headlines were mechanical issues in the silly way GDP is determined (accounting for GDP at point of production instead of point of final sale or subtracting imports even though imports are a positive for economic activity). The table below breaks down GDP contribution so that you can see that the consumer was still consuming.

Note that even the drag by the government on GDP will disappear shortly - the further we get away from the end of stimulus and the beginning of austerity. The real economic issue is the lack of investment. So there is no reason to be overly concerned about 1Q2014 GDP. Still, it is concerning when year-over-year real GDP hovers near 2% or less. At 2% it is too easy for a poorly performing economy to trip over a rather insignificant "disruption" - say bad weather or other act of God.

Using pilot speak, 2% is the stick shaker for economic stall speed.

My usual weekly economic wrap is in my instablog.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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