In the Cliff’s Shadow, A Recession May Be Taking Root
Policy + Politics

In the Cliff’s Shadow, A Recession May Be Taking Root

iStockphoto/The Fiscal Times

Washington is focused on the fiscal cliff and the budget deficit, but by many measures the economy remains on life support, hooked up to a government-fed IV drip.

Most economists predict another year of wrenchingly slow growth, but a few observe the roots of a recession already taking hold. That creates the distinct possibility that a fiscal cliff deal hammered out by President Obama and House Speaker John Boehner would provide little help for an economy that’s been struggling since July—well before the current crisis screamed onto the public radar.

Concerns about the economy have been great enough that Obama requested $200 billion worth of stimulus funds as part of any agreement, an ask that was met with withering criticism by GOP lawmakers intent on reducing the debt. The president would like to continue the payroll tax cut and extended unemployment benefits for another year, in addition to $50 billion for infrastructure. And there’s a practical explanation for it, considering these troubling indicators that point toward a possible recession.

Take-home pay averaged $32,686 in the third quarter of 2012, a slight $25 drop from where it was previously, according to the Bureau of Economic Analysis. That matters since about two-thirds of the gross domestic product flows from consumer spending.  Industrial production and the use of manufacturing capacity have also slid during the same period, according to the Federal Reserve.

“If you look at the size of the simultaneous declines in industrial production and personal income since July, that combination has never occurred outside a recessionary context in over half a century – but it’s occurred in every recession,” Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, wrote in a Friday blog post. “This leads us to conclude that we are most likely already in a recession that began around mid-2012.”

Achuthan notes that the economy doesn’t need a major shock like the fiscal cliff in order to nosedive. The United States was nine months into the previous recession when the markets melted down with the collapse of Lehman Brothers in September, 2008.

Investment manager John Hussman surveyed the indicators and said in his latest weekly commentary, “We continue to believe that the U.S. economy joined a global economic downturn during the third quarter of the year.”

The progressive think tank Demos highlighted the fact that more than a third of the 147,000 jobs added in November came from retail, a standard seasonal bump due to holiday shopping that was initially seen as positive. But a recent Demos study found that full-time stints at major chain stores pay $21,000 a year, pretty much stringing single head-of-household employees along the poverty line.

“All of which is to say that growth itself is increasingly not much of a solution to a weak economy, when so many new jobs are like those in retail,”  David Callahan, a senior fellow at Demos, wrote in a jobs report wrap-up.

Even if these negative forecasts seem a bit far-fetched—and plenty of economists say they are—the overall picture still appears to be dour.

Macroeconomic Advisers predicts that GDP growth in the final three months of 2012 will be just 0.5 percent. Both Hurricane Sandy and a one-time decline in defense spending have subtracted from an economy that would otherwise be improving at a 2 percent to 2.5 percent clip. That’s much better, but still dreary by most standards.

Wall Street royalty like Goldman Sachs CEO Lloyd Blankfein claim that fears of a fiscal disaster—a $500 billion-plus mix of automatic tax hikes and spending cuts slated for 2013—have shackled the economy. The kind of bargain would cause the uncertainty to lift, as the engines of growth roared back to life, CEOs like Blankfein reason in public comments.

But the fundamentals examined by Macroeconomic Advisers say otherwise. The private consulting firm expects growth next year—even with an agreement—to be 2.5 percent. “GDP growth in the vicinity of 2.5 percent next year would imply there is not likely to be much sustained improvement in unemployment for at least a few more quarters,” it said in its most recent weekly commentary.

The usual rule of thumb is that unemployment falls when GDP increases by more than 5 percent. Unemployment fell to its current level of 7.7 percent in part because frustrated workers exited the labor force.

But a deal on the fiscal cliff also poses a threat if it causes government spending to contract by too much and the private sector can’t fill in the gap. The Jerome Levy Forecasting Center recently cautioned in a client note that a recession would ensue if the federal government tightened its deficit by $250 billion—less than half of the full fiscal cliff.

Based in New York, the center anticipates “another year of modest expansion.” It’s closely monitoring trade and one critical component of the economy: non-defense capital goods, which reflect how much confidence companies have in the economy through their orders of new machinery and computers.  New orders for non-defense capital goods, excluding airplanes, have been flat so far this year.

Kevin Feltes, an economist with the forecaster, told The Fiscal Times: “It’s looking about as bad as it ever does, outside of heading into a recession.”