A recession in 2012 is becoming more probable.
In an apparent attempt to camouflage the anticipated poor data, the United States Bureau of Economic Analysis (BEA) may employ a methodology that underestimates inflation and overestimates real Gross Domestic Product (GDP).
The U.S. Bureau of Economic Analysis (BEA) released a report on July 29, 2011 indicating revisions are being made to current-dollar GDP for the period 2003 through 2011 IQ.
The Bureau of Economic analysis (BEA) will publish a more detailed analysis of these results in the coming weeks. This information will appear in the BEA monthly journal, Survey of Current Business, entitled "GDP and the Economy."
The current BEA findings, which are summarized below, indicate the BEA overestimated real GDP growth from 2007 through 2010.
For the period 2007–2010, real GDP actually decreased 0.3 percent per annum. Previously, the BEA reported that real GDP had increased less than 0.1 percent per annum.
From the fourth quarter of 2007 to the second quarter of 2009, real GDP actually decreased 3.5 percent per annum. Previously published BEA figures indicated it had decreased only 2.8 percent per annum.
It appears the BEA will utilize the "chained dollar" methodology for future calculations. This methodology tends to understate inflation and overstate real GDP.
Chained dollars represent the change in total expenditures for goods and services (Gross Domestic Product). It is NOT a measure of the relative price changes for specific products over time. The chained dollar methodology incorporates product substitution (e.g., substituting less expensive items for more expensive items). Therefore, it tends to underestimate inflation and overestimate real GDP.
Data from other sources suggest future reductions of economic activity.
The combined Philadelphia Federal Reserve Bank Economic Index and the University of Michigan Consumer Price Index portend a 2012 recession for the United States.
Since 1965, a recession is highly likely when this aggregate index is 80 or less. For the past six months, this index has been within this range. Recently it dropped to 30.
During the previous 60 years, a recession took place when year-over-year nominal GDP growth fell below 2% and year-over-year real GDP growth was negative. Both scenarios are currently operative.
Over the past 35 years, a recession occurred when the weighted composite index of surveys from the Federal Reserve Bank (FRB), National Federation of Independent Business (NFIB), and the Institute for Supply Management (ISM) fell below 30. It breached 30 several months ago. It recently fell to 25.
The Michigan University Consumer Sentiment Index is well below the historical mean. The current measure ranks as the third worst reading ever, close to that recorded several years ago during the 2008 financial collapse.
Consumer sentiment is a strong indicator of near-term consumption patterns. Weak sentiment portends weak demand for products and services, which would reduce economic activity and income.
Should the U.S. experience a recession, it would be the second in over 60 years to occur without an inverted yield curve.
An inverted yield curve indicates short-term yields exceed long-term yields. Near-term uncertainties typically produce these results, since demand for these assets fall. As demand decreases, prices fall and yields rise.
The yield inversion may be averted due to the very strong monetary accommodation policy instituted recently by the Federal Reserve Bank. My column two weeks ago addressed this topic in more detail ("Even More Fed Up With the Fed").
The Federal Reserve Bank plans to keep the federal funds rate at 0%-0.25% for the next two years, at a minimum. This will be achieved through increases to the money supply, primarily by reinvesting proceeds from maturing U.S. Treasury bonds.
Despite the lowered nominal growth, inflation is increasing. According to the United States Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) for July reached an annualized rate of 2.9%, while core inflation, which excludes food and energy, was 3.3%. Both figures exceed the implicit target of 2% set by the Federal Reserve Bank.
The inflation data suggest a 2012 cost of living adjustment (COLA) to Social Security of over 3%.
Increased recessionary pressures are present in the labor market as the supply of labor lacks the requisite skills demanded by business. Unfilled job vacancies that result will further depress economic activity.
Moreover, fiscal and regulatory uncertainty abound in the current legislative and executive climate. This poor environment has reduced demand for future business planning, which bodes ill for short term economic prospects.
Since WWII, no presidential incumbent seeking reelection (10 in total) was victorious with a job approval rating under 48%. Today, the approval rating for the President Obama is 40%.
Additionally, the economic approval rating for the president is 26%, while 71% disapprove (45% net negative approval). This is in stark contrast with the beginning of his presidency when 59% approved and 30% disapproved (29% net positive approval). Therefore, the net positive economic approval rating for the president has dropped 74 percentage points.
Low nominal economic growth, increasing inflation, and rising unemployment suggest a probable 2012 recession.
Given these data and prognostications, the reelection of President Obama seems less certain.
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