Real U.S. GDP growth rate from the first quarter of 2009 to the second quarter of 2016. The maroon curve is a linear fit to the data from Q1 2014 to Q2 2016.
Image Credit: St. Louis Federal Reserve District Bank/FRED

Today the Commerce Department announced the GDP growth rate was a very disappointing 1.2 percent for the second quarter of 2016. This is considerably below the 2.6 percent growth expected by economists. To make matters even worse, the first quarter GDP growth rate was revised downward to 0.8 percent, making the average annualized growth rate for the first half of the year 1.0 percent.  This is a very far cry from the U.S. historical average of 3.22%.

A Prelude of Recession?

Adding this new data to past data gives us the plot above. The superimposed maroon line is a linear fit to the data from the first quarter of 2014 to the present, which as you can see gives us a declining linear trend. This is completely consistent with the Federal Reserve’s Labor Market Conditions Index (LMCI), which is plotted below. The maroon line is again a linear fit to the LMCI between January 2014 and June 2016.

The linear fit over the past two years again shows a declining linear trend for the change in the LMCI. This change in the LMCI from the previous reporting period is roughly proportional to the LMCI’s time rate of change; its importance lies in the fact it is an almost perfect coincident economic indicator. This change in the LMCI has minima located in the middle of recessions and peaks at the peaks of expansion, as shown in the plot below.

Note how the troughs of this variable are centered in periods of recession, as denoted by the gray shaded bands. Therefore, it is a very worrisome sign that the linear trends of both GDP growth and LMCI change are lines with negative slope. This is strongly suggestive of an approaching recession, which is also consistent with scores provided on both my leading economic indicators and coincident economic indicators pages.

Other Indicators

Another indicator consistent with a slump toward recession is nonresidential fixed investment, which is a measure of business spending. This indicator fell 0.6 percent in the second quarter, making it the third quarter in a row for it to fall.

On the other hand, personal consumption expenditures rose 3.7 percent.

How long can personal consumption continue to rise in the face of declining GDP and of corporations caught in the grip of a corporate earnings recession? Not for very long, I think.

Secular Stagnation?

Unlike the ends of other recessions, this recovery has never shown the robust growth we have seen in every other recovery since the end of the Great Depression of the 1930s. With the Great Recession being about seven years in the rear-view mirror, this alarmingly low growth is a very inconvenient and embarrassing fact for Keynesians to explain. Despite all their recommended government economic stimuli, both fiscal and monetary, economies all over the world, but especially in the United States, Europe, and Japan, are either slumping toward or are actually in recession. As a result some Keynesians, under the leadership of the the eminent economist Lawrence Summers, are attempting to resurrect the Keynesian idea of secular stagnation.

The word “secular” is meant to convey the fact that this stagnation is not part of the business cycle, but is instead long-term, permanent, and not tied to any business cycle. The idea was originally developed by the Keynesian economist Alvin Hansen in 1937. Hansen was motivated by the same difficulty as Summers and his colleagues are: the failure of Keynesian nostrums to generate robust growth.

The basic idea of secular stagnation is that businesses can not find productive ways to invest their capital, and that lack of investment dooms an economy to lackluster or no growth. A very important part of the secular stagnation idea is stagnation occurs because of market failures to present productive opportunities for investment. If one accepts free-markets are to blame, it is a very short step to acceptance that government demand must substitute for private demand, and Keynesian government stimulus becomes a never-ending way of life.

As always with Keynesians, anything that goes wrong with the economy is always due to the dysfunction of free-markets: government is never to blame. Yet, it is very easy for anyone to find a great deal of evidence that government should bear the primary blame for the unbalancing of supply-demand relationships that is the fundamental cause of recessions. To see some of the reasons for believing government, not the free-market, is the primary culprit in causing almost all of our economic problems, see the following posts on government regulations:

• The Burden of Economic Regulations
• The Debilitating Effects of Obamacare
• Economic Effects of the Dodd-Frank Act
• The EPA, CO2, Mercury Emissions, and “Green” Energy

and the following posts on taxes:

• Beware BEPS!
• Economic Effects of Current Tax Policy
• The Rahn Curve, Hauser’s Law, the Laffer Curve and Flat Taxes
• Big Corporations Abandoning the U.S. at an Increasing Rate

and the following posts on the Federal Reserve:

• Current Economic Effects of the Federal Reserve
• Quantitative Easing and Its Effects
• Why Have ZIRP and QE Failed?
• Economic Damage Created by the Fed

A Final Note

The assault on U.S. free-markets under progressive policies has been going on for many years, pre-dating the current Obama Administration by many decades. Nevertheless, Obama and his colleagues have greatly increased and hastened their decay. Holding corporations to blame for most economic problems, they seem to take every opportunity to hurt large corporations and to bring them under the sway of increasing governmental controls. Even though they aim at large corporations, they often miss and hit small companies instead. For example, the Dodd-Frank Act regulations have hurt small community banks even more than the large banks, and EPA regulations are making it hard for small businesses and farms, which do not have the assets of large companies to satisfy federal regulators’ requirements, to make any profit at all.

Yet I continually read posts or hear people say that the state of our economy is fundamentally sound, and we will see improvements to growth and people’s incomes any day now. I am bewildered why people would think our economy is basically healthy when GDP has been low and trending downwards for the past two years, when middle class wages have been stagnant, and many large businesses are fleeing the country to relocate themselves in more capital-friendly countries like Ireland and Great Britain. In what ways has our country changed in the last few years to encourage economic growth and the survival of the organizations that actually produce our wealth? I can not think of one.

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