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Recession prediction: an unreliable science

The incomes of typical Americans rose in 2015 by 5.2 percent, the first significant boost to middle-class pay since the end of the Great Recession, the Census Bureau reported on Tuesday morning. There were 43.1 Americans in poverty on the year, 3.5 million fewer than in 2014. The numbers, from the government's annual report on income, poverty and health insurance, suggest the recovery from recession is finally beginning to lift the fortunes of large swaths of American workers and families. Last week, the Agriculture Department released its annual data on hunger in the United States, showing that food insecurity declined substantially last year for the first time since the recession.

Are we headed for a recession? No one knows for sure. The rapid changes in the U.S. and global economies make reliable predictions difficult and indicators even more unclear than those that preceded the Great Recession of 2008. Moreover, economists are terrible at predicting recessions.

Many of the factors that define a recession — increasing unemployment, falling stock markets and negative consumer sentiment — are not now present in the economy. In fact, the U.S. economy has been growing for over 10 years, the longest run on record. Yet this expansion has been weaker than most and its gains distributed far more unevenly than in previously growth cycles. Recession history may no longer apply. It’s hard to know where we are.

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According to Matthew Mush at the investment bank UBS, this has been a “two-tier recovery.” About 60% of Americans have benefitted financially, 40% have not. This latter group has seen paltry or volatile wage growth, along with rising costs of housing, health care and education, and increased levels of debt.

U.S. economic growth slowed from 3.1% in the first quarter of this year to 2.1% in the second quarter. This decline potentially sets the stage for what could be a more tepid pace of growth for the rest of the year. If the economy contracts for two consecutive quarters, the National Bureau of Economic Research usually defines this as a recession. Bond markets have been sounding the alarm. Plenty of Americans are worried. They see our heavy reliance on globally interconnected production chains, a financial system addicted to cheap money, a fast-rising asset bubble and a political system that is toying with extreme policies.

Other current risks include private debt. It is high by historical standards — 250% of the GDP. If the Federal Reserve continues to cut interest rates for a prolonged period to sustain growth and support the stock markets, it could weaken the banks. Europe knows this painful reality. It is currently suffering with weak banks and negative interest rates.

 Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) in New York City. The Dow Jones Industrial Average fell sharply Wednesday morning, after the bond market flashed a warning signal suggesting an eventual recession.
Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) in New York City. The Dow Jones Industrial Average fell sharply Wednesday morning, after the bond market flashed a warning signal suggesting an eventual recession. (Drew Angerer/Getty)

The growing trade strife with China is intensifying to the point that we now risk a currency war. President Trump has declared China a “currency manipulator” and has moved to take requisite action. This enlarging conflict between the world’s two largest economies has spawned serious, and potentially chaotic, market uncertainty. We are now locked in a full blown trade war and a potentially serious currency conflict. We have already seen the losses and bankruptcies inflicted on American farmers by China’s reduced purchases.

Despite the president’s meritorious goals of fair trade, some of his actions — along with China’s retaliations — are actually suppressing growth. High tariffs raise prices to consumers and to businesses, thereby reducing purchasing power and suppressing growth. The U.S. economy constitutes one-fourth of the world’s economy. If it goes down, other economies will follow.

It is hard to predict recession given so unfamiliar and varied an economic landscape. Some factors are clear and alarming. However, there are other harbingers of an economic downturn. The U.S. and global manufacturing are in decline, levels of business confidence are deteriorating as uncertainty increases, car sales and real estate construction are falling, capital spending is drying up as more money moves into corporate buybacks, U.S. exports to China fell 19% in July, the economies of Europe and China are weakening, student debt is at unprecedented high levels and, lastly, the U.S. faces increasingly negative demographics of an aging population, low birth rates and fewer Americans working.

These factors, taken collectively, are looming threats to economic growth and stability. Some pose near-term risks, others are less immediate. Drawing reliable conclusions regarding their impact may be impossible. Whatever we assess the situation to be, the Fed alone can’t fix it. The president in his erratic policies is making it worse. A dysfunctional Congress has abandoned any role of leadership in grappling with the nation’s economic uncertainty and looming global dangers.

There is one certainty: Sustained economic growth is not inevitable. Keep an eye on whether consumer spending drops and whether businesses stop hiring.

Perry L. Weed, attorney and founder/director of the Economic Club of Annapolis. His e-mail is plweed@verizon.net.

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