Clarity is a virtue when it comes to the business cycle. It’s also unusual. The US is an exception, or at least it has been, according to Scott Sumner, an economist at Bentley University and a prolific blogger on macro matters. “The US has a really weird economy,” he writes. “All our recessions are 100% clear-cut. Either we have a recession or we don’t. Normal countries have borderline recessions. Not us.” But this uncommon trait “is about to end, and very soon we’ll have debatable recessions,” Sumner advises. If he’s right, macro analysis—looking for signs of major shifts in the economic trend in particular—will be a lot tougher.
For some perspective, Sumner points us to Japan, which reportedly slipped into a new recession in this year’s third quarter. But is that label appropriate for country with a jobless rate at a low 3.6% (vs. 5.8% in the US and 11.5% in the Eurozone)? Indeed, neither the US nor Europe is in recession, partly due to positive GDP comparisons (albeit just barely for the countries that share the euro).
The US business cycle has, to date, been a paragon of clarity. The tell-tale signs that separate growth from contraction have been relatively clear. Unemployment rises sharply, spending and output decline, and it soon becomes obvious where the expansion ended and the slump began. One of the advantages of clear-cut breaks in the trend: higher odds of success for developing an econometric model that generates early warning signals of macro danger (see my Economic Profileupdates, for instance). No one will confuse the art/science of analyzing the business cycle as easy, but Sumner thinks this corner of macroeconomics is destined to suffer a higher level of nuance.
He admits that he could be mistaken, perhaps because of a major shift in, say, immigration policy or some type of economic reform that materially alters the macro landscape for the better. Meantime, several factors are unfolding that are pushing the US into an era of relatively subtle business cycles. “The prime age workforce will soon stop growing, and productivity growth is slowing as well,” he notes. “Get ready for lots of phony ‘recession’ stories, especially when the party in power is not well liked by the intelligentsia.”
Driving Sumner’s outlook is an expectation that the trend rate for real GDP growth for the US is destined to fall to a sluggish 1% from 3% of late.
After we “recover” it will no longer be unusual to see two straight quarters of falling RGDP. But will they be true recessions? Or the sort of phony “recession” that people think they are seeing in Japan, and that was reported in the UK a couple years ago, which later vanished with revisions in the data? (I’m referring to Britain’s triple dip; even the double dip was very debatable, with only a 1/2% rise in unemployment.)
