US stuck below stall speed

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The headlines for the Q2 US GDP report showed a downgrade to real GDP from 2.5% to 2% SAAR. This is the traditional threshold for ‘stall speed’ – a period of slow growth which typically precedes recession. The best reference on this sort of analysis is this paper by the FRB’s Jeremy Nalewaik.

The second GDP report, however, gives us a lot more interesting information than the first release. In particular, the second cut gives us income estimates – which are considered to be a superior real time indicator of how the economy is travelling.

The short summary is that the US is travelling ‘poorly’: US real GDI was +0.4% SAAR (~0.1%q/q), following +0.3% SAAR in Q2. This pulled the YoY pace of growth down to 1.1%. Given this starting position, the risk of contraction is quite elevated.

The two papers I linked to above are both by the FRB’s Jeremy Nalewaik, so it should come as no surprise that the concepts can be linked: a sustained period of sub 2% real GDI growth is a better leading indicator of recession than a sustained period of sub 2% real GDP growth.

By itself, the inability of the US economy to grow at a pace that would reduce the unemployment rate was a concern. Given that the incomes data is weaker than the production data, and that year ahead is likely to bring a European credit crunch and recession (possibly sudden fiscal tightening) it is easy to imagine a mild US recession.

The only reason to doubt it is that the normally cyclical sectors are already so beaten up.


  1. Speaking of US recession indicators, fund manager John Hussman has developed his own recession composite that he says has (jointly) always and only been associated with an impending or ongoing recession. The indicators are:

    1: Widening credit spreads: An increase over the past 6 months in either the spread between commercial paper and 3-month Treasury yields, or between the Dow Corporate Bond Index yield and 10-year Treasury yields.

    2: Falling stock prices: S&P 500 below its level of 6 months earlier. This is not terribly unusual by itself, which is why people say that market declines have called 11 of the past 6 recessions, but falling stock prices are very important as part of the broader syndrome.

    3: Weak ISM Purchasing Managers Index: PMI below 50, or,

    3: (alternate): Moderating ISM and employment growth: PMI below 54, coupled with slowing employment growth: either total nonfarm employment growth below 1.3% over the preceding year (this is a figure that Marty Zweig noted in a Barron’s piece many years ago), or an unemployment rate up 0.4% or more from its 12-month low.

    4: Moderate or flat yield curve: 10-year Treasury yield no more than 2.5% above 3-month Treasury yields if condition 3 is in effect, or any difference of less than 3.1% if 3(alternate) is in effect (again, this criterion doesn’t create a strong risk of recession in and of itself).

    These conditions were met in early August (as well as in November 2007 and October 2000) and were followed by the ECRI recession call in late September.

    Hussman also notes at the first link that in 10 out of the 12 occasions since 1950 that year-over-year growth in real GDP has dipped below 2%, the economy was already in recession or quickly entered one.

    I just heard Steve Liesman on CNBC say that the ‘smart money’ moved away from pricing in a recession “a while ago”, so if it happens, equities will plunge. I expect the S&P500 to fall below 950 and the ASX200 to go below 3750 some time next year even with a mild US recession.

  2. their second estimate is essentially the same as what we get here. The initial estimates involves forecasts by the Commerce Department which as one might expect are usually wrong.
    In terms of the US economy the output gap is widening not narrowing and the government is negative for economic growth.

    Amazingly the Japanese experience is being ignored and thus repeated

    1. I think we are still a little different in that the ABS headline series is an average of production, expenditure and income accounts. The US do not average their ests in this way.

      Sent from my iPad

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