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Tuesday, December 22, 2015

Will There Be A Recession Soon?

The government issued a revision for the GDP achieved in the third quarter.  The figures now show a 2.0% growth rate.  That's slower than the already anemic growth rate for the first six months of the year.  But here are a few important things to consider about that growth rate:

1.  The Federal Reserve had interest rates at or near zero during that entire time.  In other words, we had the most pro-growth monetary policy possible.
2.  There was a massive fiscal stimulus which should boost the economy.  The federal deficit (which is a pretty good measure of that sort of stimulus) was still running at more than half a trillion dollars per year.  This is the seventh year in a row of massive stimulus spending.
3.  The price of oil and that of natural gas were very low during the quarter.  That put cash into the pockets of consumers who paid less to fuel their cars.  It also cut costs for business which paid less for transportation.  This too is a massive stimulus for the economy.
4.  Despite all these stimuli, growth was very slow.  Businesses were getting squeezed as corporate profits fell during the quarter by more than 5%.  That the third quarter of the last four during which corporate profits declined.
5.  Even with that slow growth rate, America's economy still grew faster than that of the European Union, Japan, Canada and Australia.  It is nearly impossible to tell the actual growth rate for China since the government statistics there are unreliable.  Most likely, however, China's growth rate was less than the USA as well.  That means that there are no large positive areas of the world economy that could pull others back into growth.  The lesser developed countries are doing even worse.

Put all this together and the outlook for 2016 is not good.  We could easily see the entire world slip into recession (or worse). 

The USA needs to change its economic policies to something that will be strongly pro-growth.  The efforts of the last seven years under Obama have not ever gotten the economy back to the growth rate that was normal for the previous 30 years.  Sadly, we may soon be back in recession if nothing is done.




 

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