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New recession begins next year
Commentary: Blunt assessment from bearish economist
That's the debate going on these days from executive offices to the local malls. Business owners, workers and, yes, even economists are trying to decide whether the U.S. economy has hit a speed bump or is heading for a collision. We all know growth is tepid, unemployment is a bear and housing, well, stinks. That's why major Wall Street firms, the International Monetary Fund and, on Wednesday, the Federal Reserve all slashed their estimates for U.S. GDP growth this year.
Housing remains critical, so I looked up one of the few people who saw the housing bust and financial crisis coming years before they happened: Gary Shilling, economist and author of “The Age of Deleveraging.” While his steadfast bearishness didn't surprise me, his blunt assessment did.“I'm predicting another recession next year,” he told me.
Not a double dip, he emphasized, because we're already two years from the end of the last recession and 3 ½ years from the business cycle's previous peak, in December 2007. Historically, he said, economic expansions last about three years, especially in long down cycles of the kind he thinks we've been in since 2000.So, he's looking for a brand new cyclical recession beginning in 2012.
Many Americans will be forgiven if they can't see the difference between that and the recovery we've been experiencing.That's Shilling's point. Usually, deep recessions like the one we just lived through are followed by strong snapbacks, like a growth slingshot.This time, however, the recovery has been “distinctly subpar,” in his words. “As of the first quarter, ..real GDP is barely above its peak in the fourth quarter of 2007, whereas earlier recoveries were well above their previous tops 13 quarters later,” he wrote in a recent edition of his newsletter, Insight.
Sputtering economy
There are good reasons for that, beyond the particularly tough toll financial crises take on growth.The economy, he says, is like a four-cylinder engine, and a recovery usually requires all four to be firing. They are consumer spending, employment, housing and the reversal of the inventory cycle.
Shilling thinks only the last is really recovering — i.e., companies that brutally liquidated inventories during the recession have had to rebuild them through boosting production and some additional hiring as demand bounced off its lows.But consumer spending has made only a partial comeback, concentrated among more-affluent buyers. Everyone else has been weighed down by weak job and income growth and the continued housing catastrophe.
We have seen some improvement in employment, albeit slow of late, and it's nowhere near what we've had in past recoveries. Mostly employers have just stopped laying people off, and when they hire, it's often on a part-time or temporary basis.
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