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One Step Closer to Recession

One Step Closer to Recession

As you know by now, the Federal Reserve raised interest rates again yesterday, its eighth increase since the rate hike cycle began in 2015.

In his post-announcement press conference, Jerome Powell cited a strong economy, low unemployment, solid growth, etc. He said that “It’s a particularly bright moment” for the economy.

Barring significant developments, the Fed may raise rates again in December and perhaps three times next year.

Meanwhile, the Commerce Department announced this morning that second quarter U.S. GDP expanded at a 4.2% annualized rate, confirming the earlier estimate.

On the surface it might look everything is great, that it is a particularly bright moment for the economy. But if you take a hard look behind the numbers, a different picture emerges.

A lot of the cheerleaders say Trump’s programs of tax cuts and deregulation will produce persistent trend growth of 3–4% or higher.

Such growth would break decisively with the weak growth of the Obama years. It would also make the U.S. debt burden, currently at 105% of GDP, more sustainable if GDP were to grow faster than the national debt.

There’s one problem with the happy talk about 3–4% growth. We’ve seen it all before.

In 2009, almost every economic forecaster and commentator was talking about “green shoots.” In 2010, then-Secretary of the Treasury Tim Geithner forecast the “recovery summer.” In 2017, the global monetary elites were praising the arrival (at last) of “synchronized global growth.”

None of this wishful thinking panned out. The green shoots turned brown, the recovery summer never came and the synchronized global growth was over almost as soon as it began.

Any signs of trend growth have been strictly temporary (basically moving growth from one quarter to another through inventory and accounting quirks) and are quickly followed by weaker growth. In the first quarter of 2015, growth was 3.2%, but by the fourth quarter that year growth had fallen to a near-recession level of 0.5%.

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