The Economic Situation, September 2014

In the June Situation report, I promised a better second-half economy. I did more than keep my promise. The first estimate for 2Q2014 GDP growth brought a steaming 4.0 percent, along with an upward revision of lQ2014’s growth from minus 2.9 percent to minus 2.1 percent. We swung high after swinging low.

Is this too good to be true? I am afraid so. Are we headed toward a steaming second half? No steam, but better than lukewarm positive growth. Look for calm waters.

I am not suggesting that Department of Commerce economists fudged the number. No, not at all. What I am saying is that 1.66 percentage points of that 4.0 percent came from increased inventories. Subtract the 1.66 and you get 2.3 percent, which is closer to the real thing. The problem here relates to intended versus unintended build-up. If all producers taken together believe the economy is moving into high gear, then more packing the store is called for. But if those producers made an earlier miscalculation, the unintended buildup will be corrected. It’s final sales that count.

I think there is some miscalculation reflected in that 4.0 percent number; we should look for 2.3 percent in 3Q2014 and 3.0 percent in the year’s final quarter. If that happens, GDP growth for the year will hit 1.7 percent, and that’s a bit pale considering that 2013 hit 1.9 percent and 2012, 2.8 percent.

As shown in the accompanying chart, which gives estimates for 2014 and 2015, at least one other forecaster agrees. I call attention to the general agreement that 2015 will generate 3.0 percent growth.

Recession in 2018?

For more than a year, in presentations around the country, I have included this orange-backed summary of GDP growth expectations. In just one of these events, someone in the audience objected. “I don’t know of any other economist who is even talking about a recession . . . any time,” was the comment. I responded by explaining why I was predicting a 2018 recession. My forecast was based largely on the fact that the United States has a recession about every five years, and that most of those were caused when the Federal Reserve Board, out of fear of inflation, hit the monetary brakes, and the economy hit the ditch. With this expansion long in the tooth, but still with no evidence of meaningful inflation, I hold the opinion that inflation will show up and then get a Fed stiff-arm around 2018.

For what it’s worth, I am no longer a Lone Ranger on the matter. “How long will the expansion last?” asked the August 16th Economist (p. 22). The answer? Until 2018. The logic? The same as mine. Of course, this doesn’t say to mark your calendars and batten down the hatches. We could both be wrong. It does say that there is a historical and an analytical basis for expecting a recession in the next three to four years.

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