If you believe things are bad now, just wait because they’re about to get much worse. That’s the forecast from the Economic Cycle Research Institute (ECRI).

In their latest report, the firm says that a second recession is coming and that “there’s nothing that policy makers can do to head it off.” ECRI also notes that reliable indicators of recession are now “collectively behaving as they did on the cusp of full-blown recessions.”

ECRI’s warning may just be another among many similar messages from many different quarters. The company claims that it doesn’t pull the trigger on such predictions lightly having accurately predicted the last three recessions with no intervening false alarms.

The current state of the business cycle, as portrayed by ECRI, is low sales leading to lower production which leads to lower employment and lower income. Then the snake swallows its tail and the cycle repeats. ECRI told Yahoo! Finance that the best case scenario is a “mild” recession.

The economic recovery, such as it was, simply wasn’t robust enough to break the cycle in any meaningful way. Calls to cut federal, state, and local government spending are only likely to make the situation worse. Consumers are already keeping their hands on the wallets and if the public sector quits spending as well, sales will only fall further.

But what about deficits? If governments continue to spend, deficits will only continue to skyrocket. The argument that rising deficits now are necessary to break the vicious cycle ECRI describes doesn’t get a lot of traction among voters or most politicians in the US. It seems counter-intuitive somehow that spending more in the face of already massive debt is the answer.

Many economists point out that with interest rates near zero it makes sense to borrow now to get the economy going and then to pay the debt back later. And the borrowing must go to putting Americans back to work, and raising the nation’s income so that people start spending again.

The main counter arguments to that are to cut government spending and to reduce taxes, particularly on businesses. When governments cut spending, they fire people. That won’t help the unemployment problem, it will only make it worse. Cutting taxes reduces governments’ revenue which means that they can only run up bigger debts or fire more people.

Policy paralysis in the US, particularly as we head into an election cycle, virtually guarantees that ECRI’s prediction will come true. We’re in for a very tough year.

Paul Ausick

 

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