We economists are said to be practitioners of the “dismal science”. Given the number of lugubrious characters that I have met at economics conferences and academic departments, I can certainly understand where that notion comes from. I especially remember a reputable economist I had lunch with at a conference in Boston back in the ‘90s. I praised the strong growth of the American economy and expressed my surprise at how long it had been since the last recession.
“Don’t worry,” said the dismal colleague. “If we give this economy enough time it will most certainly go into a recession again.”
Sure enough. A couple of years later the Millennium Recession ended the dot-com era and put a cap on the second-longest growth period in post-World War II American history.
I have always felt a bit uncomfortable about the idea of practicing the “dismal science”. Optimism is so much more fun. But at the same time, as an economist I have the responsibility to “tell it like it is”, and for some time now I have been pointing to emerging signs of a recession. It is not imminent, but is probably going to hit us in 12-18 months.
On Friday October 2 the Bureau of Labor Statistics released new data that, unfortunately, reinforce the recession forecast. Before I explain the data, let me point out why it is important to know about a recession in advance. Our federal government will spend $4 trillion this year, borrowing almost half a trillion of those dollars. If we hit a recession late next year – during fiscal year 2017 – the deficit could easily grow bigger than $1 trillion again.
If that happens, we will have to deal with a debt crisis of European proportions. By understanding now what is coming down the pike, Congress still has enough time to do what is necessary to avoid that crisis.
So what is in the October 2 BLS News Release that hints of a recession? First of all, unemployment is now down to 5.1 percent, a level that historically has been close to a tapped out labor force – or full employment. There is still an untapped labor reserve in the form of all those millions who have left the workforce during the Great Recession. However, they will not come back onto the labor market unless motivated to do so by stingy welfare and entitlement programs. That is unlikely to happen: as exemplified with the food-stamp (SNAP) program, government has gone in the exact opposite direction during the recession.
This means, bluntly, that our unemployment rate is basically as good as it will get. From hereon – dismal warning! – it can only go up again.
The second recession hint in the new BLS data is in the jobs expansion data. In the last two years the growth in new jobs has looked like this (with the vertical axis measuring thousands of new jobs per month):
There seems to have been a peak in jobs growth somewhere in the second half of 2014. The labor market is still adding new jobs, which good, but the actual number is declining.
Let us compare this shape of the jobs creation curve with the lead-up to the Millennium Recession:
Here the job-creation period ended rather abruptly in early 2000, but it still took about a year until the recession started destroying jobs.
The last couple of years before the Great Recession are even more interesting:
The peak in job creation came as early as 2005, after which there was a protracted period of transition into a recession. It took until early 2008 before employers began shrinking their payrolls.
Again, one variable does not tell the whole story about what shape the economy is in. Macroeconomic analysis is much more complex than that, and as I noted two weeks ago economic forecasting is a notoriously difficult job. At the same time, some variables are more important than others, and job creation is at the top of the priority list. As we know from the last two recessions, once job creation peaks, it is only a matter of time before the jobs gains are replaced with jobs losses.
The combination of low unemployment and other macroeconomic variables hinting of a recession leads me to conclude that jobs creation has peaked for this growth period. The big question now is: will it take one year, or two, before we hit a recession again?
If I were a member of Congress, or a candidate for President for that matter, I would assume that the recession is one year away. I would not gamble with the prosperity of our children and grandchildren. It is time for Congress and President Obama to stop punting on the deficit. It is time for them to pass a debt-limiting balanced budget amendment, to prioritize which entitlement programs we can pay for and which ones we need to gut, and to put an end to frivolous tax cuts. Then, and only then, can we avoid a debt crisis in the next recession.
Which, I dare say, is coming.
Sven Larson, Ph.D., is an economist and Member of the Council of Scholars of Compact for America. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe. Find his daily blog articles at America’s Fiscal Future.