The Case Against U.S. Economic Growth

Fed Chairman Bernanke recently stated that, even with monetary easing, the U.S. economy could be dragged back toward recession because of risks to the recent trend in job creation. The main engines of gross domestic product may not be sufficient to create a rapid improvement in unemployment. S&P made another case that the economic expansion could end as rapidly as it began.

In a new report S&P says:

The question now is what letter the recovery will look like. Our baseline forecast assumes a slow recovery from the June 2009 recession trough. But the risk of another downward leg on the recession remains real. The high-growth scenario is that we could again be underestimating the American consumer, and, after a weak start, a recovery could still turn into a more typical “V”-shaped expansion. However, the Japanese experience of the 1990s suggests that we should not ignore the risk of a fourth scenario, an “L”-shaped recession where the economy could stagnate for years.

S&P’s analysts also worry that unemployment will remain high through 2014. And oil prices, it reports, will remain above $100 for WTI for some time.

It is disturbing that any well-regarded group of analysts worry about the chance of a V-shaped expansion. That means there could be a very sharp leg down, and the drop would occur suddenly and soon. The setback to unemployment levels might push joblessness toward 10% again. The effects of that on the housing and consumer spending markets are already well-known. And the housing market still has not recovered, by most measures, from the collapse that took place in 2006 and has lasted through the present. It drove down values by nearly 50% in some regions.

S&P points to $100 oil as another concern. Economists still have not come up with a reliable model for when oil prices will drag down consumer spending at a fast pace toward 2008 or 2009 levels. The price of oil already must have challenged the budgets of many middle-class people who rely heavily on the use of their cars.

The S&P forecast offers nothing new or special. Yet, it is a good summing up of the near-term and extremely dangerous risks to the economy.

Douglas A. McIntyre