Lurching Back into the Vicious Cycle of Recession

Last Friday the Commerce Department announced that private sector wages and government benefits both fell in August.  The combination of these two undesirable data points resulted in the first monthly decline in overall personal income since October 2009. What this means is that by and large people didn’t gain financial ground in August; they lost it.

Also on Friday, Economic Cycle Research Institute (ECRI), the leading authority on business cycles, reported that their “most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not ‘soft landings.”’ ECRI could be wrong, of course.  However, they have correctly predicted the last three recessions without any false alarms in between.  Here are several grim notes from ECRI on what to expect…

“A new recession isn’t simply a statistical event.  It’s a vicious cycle that, once started, must run its course.  Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator.  That’s what a recession is all about.

“It’s important to understand that recession doesn’t mean a bad economy – we’ve had that for years now.  It means an economy that keeps worsening, because it’s locked into a vicious cycle.  It means that the jobless rate, already above 9 percent, will go much higher, and the federal budget deficit, already above a trillion dollars, will soar.

“Here’s what ECRI’s recession call really says: if you think this is a bad economy, you haven’t seen anything yet.  And that has profound implications for both Main Street and Wall Street.”

Implication for Main Street and Wall Street

Here at the Economic Prism we prefer a growing economy to a shrinking economy.  For when the economy’s growing it’s much easier to increase personal wealth.  When well-paying jobs are plentiful any ne’er-do-well can comfortably get by.  All they have to do is show up to work each day and go through the motions.  The rising tide of the economy lifts all boats.

But when the economy’s shrinking even the hardest working, smartest, and most industrious workers can barely maintain their standard of living.  In fact, even with long hours, nose-to-the-grind-stone perseverance, and efficient work product delivery, their standard of living may slip.  The slacker, on the other hand, gets slaughtered like a fat turkey in November.

At the same time, the stock market acts on the economic malaise with schizophrenic ambivalence.  Wild fluctuations and dramatic price movements whipsaw inexperienced traders to death.  And top traders are able to exploit the volatility when it doesn’t bite them too.

The 401K – mutual fund – investor rides the market up and down like a wild rollercoaster and, if they are lucky, end up where they started.  Unfortunately, for whatever reason, mutual fund investors possess the uncanny ability to buy high and sell low.

As the recession plods on, aging workers will watch powerlessly as their retirement accounts languish along with their dreams of a long and comfortable retreat from the workforce.  Similarly, young, entry level workers, encumbered by an abundance of student load debt, will be unable to break into the workforce.  How bad will it get?

Quite frankly nobody knows for sure.  But if the ECRI is worth their salt this could be quite a doozy of a recession.  Certainly, before it is over there will be plenty of social upheaval and disorder like the current occupy Wall Street protest.

Lurching Back into the Vicious Cycle of Recession

Later this week we may get a glimpse of what to expect.  On Friday the Labor Department will report on September job growth.  It is doubtful that there will be enough new jobs to bring down the 9.1 percent unemployment rate.

If the vicious cycle of a new recession gains momentum service and manufacturing activity will decrease and unemployment will increase.  As unemployment increases consumer spending will decrease, causing service and manufacturing to decrease and unemployment to further increase.  Eventually the recession will refocus the economy to provide the things people want at prices they can afford.  And new jobs will be created to support a new, growing economy.

In the meantime, there isn’t a thing the Federal Reserve can do about it.  Writing checks to itself and using the phony money to buy treasuries won’t help.  Interest rates are already at 50-year lows.  The last thing the consumer needs is more credit so that they can rack up more debt.  Moreover, this policy of artificially suppressing interest rates is causing more problems than it is solving.

Last Wednesday, outgoing Kansas City Federal Reserve Bank President Thomas Hoenig said, “When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have in fact bought problems.”

Since the financial crisis in late 2008 the Fed has cut the federal funds rate to nearly zero and has bought more than $2 trillion in treasuries.  Now, after what must be the weakest recovery ever, the economy appears to be lurching back into recession.  However, with the Fed being out of monetary bullets, it’ll be up to the President and Congress to ‘do something.’

Based on their track record, we’d rather they not.


MN Gordon
for Economic Prism

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