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A Recession Without Room to Cut Rate?

  • Written by Syndicated Publisher No Comments Comments
    May 15, 2015

    Just a few months ago, most in the financial media would have scoffed at the idea that the U.S. economy might enter a new recession sooner rather than later. After months of mostly disappointing economic data, they’re not scoffing any longer and this story at The Economist (replete with a Depression era black-and-white image) is a good example.

    HOW strong is the American economy? Forecasters are pretty confident: the average prediction is for 2.6% GDP growth this year and for 2.8% in 2016. But actual growth was just an annualised 0.2% in the first quarter and, after disappointing retail sales numbers for April, the Atlanta Federal Reserve’s GDPNow model, which was pretty accurate about the first quarter, is going for just 0.7% annualised in the second. Citigroup’s economic surprise index (which shows whether data have been better or worse than forecasts) has been relentlessly negative since the start of the year.

    Does this mean that America is heading towards recession? Not necessarily. Whether or not you call it “secular stagnation”, the developed economies are in an era where growth seems to be stuttering; last year’s first quarter dip in GDP was a case in point. However, as HSBC, a bank, points out in a new research note, it is now six years since the US economy was last in recession—a reasonably long cycle by pre-1980 standards. Suppose that developed economies did slip back into recession. What could the authorities do?

    Of course, what makes the prospect of a new U.S. recession so scary is that interest rates have been stuck at zero for the last six years or so, taking away the “firepower” the Federal Reserve normally has to combat the slowdown, all of which reminds us of what Mark Twain may have once said, “History doesn’t repeat itself, but it does rhyme”.

    Images: via Flickr (licence attribution)

    About The Author

    As you may have already deduced, this is not your typical financial blog, accompanied by some run-of-the-mill investment newsletter, and I’m not your typical financial writer.

    In fact, I spent my entire working career as an engineer before retiring back in 2007 at the tender young age of 46. Two years prior to that in 2005 I started writing a blog – The Mess That Greenspan Made – mostly just to poke fun at the housing bubble and the policy makers who had led us down that path.

    Details about the investment newsletter and information about the performance of the associated “model portfolio” can be found here and if there are any questions that I can help answer, just send mail to tim@iaconoresearch.com.

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