A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.



Revoking Recession: 48th Time's the Charm?

For the last three months, year-over-year growth in real personal income has stayed lower than it was at the beginning of each of the last ten recessions. In other words, this is what personal income growth typically looks like early in a recession.

Has personal income growth ever remained this low for three months without the economy going into recession? The answer is no.

The chart depicts real personal income growth over the last 60 years, with vertical shaded bands representing recessions, and the horizontal black line marking its latest reading. Except for three one-month dips[i], income growth has not been nearly this weak in 60 years without a recession – and certainly never for three months in a row.

So how can this be happening with such an accommodative Fed? After all, in spite of more “money printing” than anyone has ever seen, actual U.S. economic growth – including income and job growth – is slowing. In fact, in the last 60 years we have not seen a slowdown where year-over-year payroll job growth has dropped this low without a recession.

The unfortunate reality is that Fed is “pushing on a string.” But, in any case, the larger point is that the business cycle cannot be repealed in a free-market economy. Yet most people think recessions amount to some sort of “failure” and, if policy makers just did the “right thing,” they could stave off recession indefinitely, meaning they could get rid of the business cycle. Ironically, one hears this from many proponents of the free market, even though the business cycle is part and parcel of how every free-market economy operates.

In the past 222 years, the U.S. economy has experienced 47 recessions. So, are we to now believe that if the Fed prints enough money, it can postpone the 48th recession indefinitely? Is it plausible that, in an era of deleveraging and very weak income growth, more money printing and borrowing will increase consumption enough to keep the economy out of recession?

As students of the business cycle, we admit to being hopelessly biased in our belief that it is simply not possible to repeal recessions in market economies. It is not whether there will be a recession, but when. And ECRI’s indicators are telling us that a recession is likely to begin by mid-year, if not sooner, though this may not become obvious until the end of the year.

[i]As the chart shows, there was a one-month spike down in income growth below its current reading in December 2005 due to the comparison with December 2004 data that included a one-time $32 billion dividend payout from Microsoft. Owing to concerns about tax law changes during the Clinton administration that induced people to move as much of their earnings as possible from early 1994 into December 1993, the resulting adverse comparison made December 1994 income growth show a one-month drop down almost to its current reading. Finally, President Clinton’s election also caused people concerned about tax hikes to shift as much of their earnings as possible to December 1992, causing earnings to then fall through March 1993, which therefore shows a one-month dip in earnings growth to just below the current threshold.

Related Insights

The Yo-Yo Years

ECRI March 1, 2012

The convergence of two cyclical patterns virtually dictates an era of more frequent recessions in developed economies. As a result, and because of the Bullwhip Effect, growth in developing economies is going to be jerked around more than people think, making for a good deal of cyclical economic contagion. In other words, we are now in the yo-yo years.


Related News & Events

Rising GDP Doesn't Rule Out Recession

CNN May 11, 2012

Yes, U.S. GDP is still rising, according to the latest reports. But that doesn't mean we've dodged a new recession. More


Recession Update

Bloomberg May 9, 2012

For the past three months, year-over-year real personal income growth has stayed lower than it was at the start of each of the last ten recessions. More



ECRI June 4, 2012

ECRI principals will be in Oslo to meet with professional members on June 4, 2012.