2011 is nearly complete, so it is time to look briefly behind us and look forward to the new year. Somehow, through some minor miracle, the American and global economies avoided recession this year. Yes, I know, “recession” has become a relative term. It’s well nigh impossible to tell the difference between the “slow” GDP growth we’ve got now and another downturn. However, a recession implies an actual contraction in economic activity, and all that entails—job losses instead of paltry gains, yet another downturn in the housing market, another nosedive in auto sales, and so on.
The “good times” of 2011 are behind us and 2012 lies ahead. What will the new year bring? John Hussman recently asked have we avoided a recession?
In recent months, we’ve observed a fairly neutral flow of economic data — not strong by any means, but offering a reprieve from the clearly negative momentum that we observed in late-summer.
The following chart is presents a consensus of economic measures that we track as a composite (long-term chart here), focusing on the past decade. Note the bounce toward zero that we’ve seen in recent months. New orders remain generally weak, but other measures are dead-neutral. Note that we saw a similar pop for a few months just as we were entering the last recession in 2007. Modest upticks in these measures – even if concerted – don’t carry much information.
And while this graph appears to show there is no cause for alarm, Hussman still sets the chances of a recession in 2012 at about 85% (in another graph not shown here). That prediction is based on his analysis of the economic indicators.
We use a variety of methods to gauge recession risk. The most straightforward is to form fairly low-order indicator sets like our Recession Warning Composite (see November 12, 2007, Expecting A Recession), that have a long historical record of accurately distinguishing recessions. These indicator sets are comprised of what might be called “weak learners” — conditions that do not in themselves have infallible records of identifying recessions, but that provide very strong signals when observed in combination with other recession flags. They include fairly straightforward conditions such as whether or not the S&P 500 is below its level of 6 months earlier, whether credit spreads are wider than they were 6 months earlier, whether the Purchasing Manager’s Index is in the low 50’s or below, and so forth.
As of last week, a simple average of 20 of these binary recession indicators continued to show a preponderance of signals still in place — a condition that has never been observed except alongside a U.S. recession.
This is the calm before the storm according to Hussman, which is is bad enough if we consider only the United States. But then there is a possibility of a global contraction led by the troubles in Europe and the ever-more-obvious downturn in China. Hussman provides charts to document those catastrophes in the making. What would happen to the American economy in the context of a global recession? More specifically—
- What would happen to America’s already unhealthy import/export balance?
- What would happen if contagion in the global finance system spreads to this country?
And then there are oil prices, which now exceed $100/barrel. If there is a global recession, we might expect demand to fall off and prices to decline. However, those prices are undoubtedly helping to push us into another recession.
If we add all of these factors together, it appears that a new recession is all but inevitable. Thus it appears we will not escape “unscathed” in 2012 as we did in 2011. (I am not talking about the Mayan Prophecy ) It appears that serious damage is going to be done next year, not only in Europe and China, but right here in the United States. This would harm many, many ordinary Americans, not only in the short-term but over the long haul. In a recent post Little Hope and Not Much Change, Financial Armageddon’s Michael Panzner cites a new study which foreshadows the long-term damage which might occur.
The John J. Heldrich Center for Workforce Development at Rutgers University has published an updated working paper, Categorizing the Unemployed by the Impact of the Recession, detailing the results of surveys conducted from August 2009 through August 2011 of American workers who lost a job during the height of the Great Recession…
Just 7% of the unemployed initially contacted by the Heldrich Center in the summer of 2009 have made it back to where they were before the recession. And just another 23% are on the way back — they have experienced a minor downward change in their quality of life that they believe will be temporary. Another third of those participating in the initial August 2009 survey can be thought of as downsized. Many here (11%) have taken a minor quality of life hit and say their financial situation is poor, but believe they will work their way out of it in time. Another 10% are in at least fair financial shape but report a minor downward change in their lifestyle they believe will be permanent.
The remaining 36% speak of cataclysmic effects of the Great Recession on them and their families. They comprise two groups, both of whom can be said to have been devastated. We consider 21% to be devastated because they are in poor financial shape and have suffered a major quality of life change, even if they believe it to be temporary. Also included in this group are respondents who report being in fair economic shape, but who have experienced a major decline in their lifestyle they expect to be permanent. Finally, there is a sizeable 15% who appear to have been wrecked by the recession. They are at the bottom on all three measures — they are in poor financial shape, have suffered a major change in lifestyle, and believe this new state of affairs will be a permanent condition.
Even if a new recession is not as severe as the “Great” one, it would still hurt those who are “climbing back,” or who were “downsized” or “devastated” in the aftermath of the financial meltdown in 2008. A new recession would further push millions of Americans into poverty or out of the Middle Class, and these injurious changes could be effectively permanent. So we need to take the prediction of a new recession very seriously indeed.
I’m sorry to tell you about this impending Bad News, but that’s just the way it looks.