The US Economies Path to Recession

By: Ronald_R_Cooke

In March of 2007, I predicted America would have a recession before the end of 2008. (see Warning: Recession Ahead at http://www.theculturaleconomist blog.blogspot.com/ . At that point in time, my thoughts were greeted with a certain amount of – shall we say – skepticism.  Well.  Here we are one year later.  It would appear the number of skeptics has decreased.

So.  What is happening to our economy?

It has been my contention the Bureau Of Labor Statistics (BLS) understates inflation when it reports the Consumer Price Index (CPI), and the Bureau of Economic Analysis (BEA) overstates “real” economic growth when it reports Gross Domestic Product (GDP). In other words, our economy is in worse shape than the federal government is willing to admit.

The BLS continues to underweight the percentage of aggregate household budgets spent on food and fuel. That decreases the CPI estimates of inflation.  Since the BEA deducts inflation from current dollar GDP (and makes some other adjustments) to calculate “Real” GDP, the result is an overstatement of Real GDP.  We can summarize the equation as follows:  Current dollar GDP - the rate of inflation = Real GDP. The effect of the BLS understatement shows up in the reported data for Q3 and Q4 of 2007.

• The BLS reported a CPI –U increase of 2.36% for Q3 2007, and an increase of 3.97% for Q4 2007.

• The BEA reported a current dollar GDP of 5.14% for Q4 2007. After deducting the effect of inflation, the BEA reported a very anemic Real GDP of .6%.

By my calculations (see CPI: Sophisticated Economic Theory, Terrible Ethics at www.tce.name ) the rate of inflation for Q3 2007 was closer to 4.02%. It is my belief consumer living costs actually went up by 5.18% in Q4. In my essay on GDP (see American GDP: Can We Trust The BEA Data? at  www.tce.name ) I projected that Q4 2007 Net GDP would be neutral or negative.  Based on reported data, Net GDP in Q4 – by my methodology – was a negative .04%  (5.14% - 5.18% = -.o4%). Furthermore, I believe Net GDP for all of 2007 versus all of 2006 was a very sluggish .61%.

So what can we look for in Q1 and Q2 of 2008?  Do not be surprised if inflation exceeds 4%, and economic growth is negative . And furthermore, when the books are closed on 2008, it would appear we could record an annual rate of inflation of more than 4.5%, a GDP of less than “zero”, and an unemployment rate of over 5.5%. 

By contrast, the United States Federal Reserve has forecasted our economy will be just fine in 2008 with a GDP growth rate of 1.3 to 2 percent, an annual average unemployment rate of 5.2 to 5.3%, and an inflation rate of 2.1 to 2.4%. 

Does it appear the Fed is overly optimistic? 

There is more downside risk in 2008 and 2009. High fuel prices, Federal fuel policy, low interest rates, declining currency values, and the Federal Reserve's easy money strategy are all inflationary.  Why on earth would anyone believe the Federal Reserve's inflation forecast?  In truth, the Federal Reserve will be caught between a rock and a hard place. Do they raise interest rates to combat inflation?  Or keep them low to float the economy? 

If our over-extended credit markets and banking system come unglued (highly likely), we could be in for a period of severe fixed asset deflation, and much higher unemployment by mid-2009. Foreign creditors will be reluctant to fund more American debt. That will drive international interest rates UP.  And what about GDP?  Pundits will be debating the terminology: is this a recession or a depression?

Am I being too pessimistic?  You decide. I could be wrong.

Ronald R. Cooke
The Cultural Economist
Author:  Detensive Nation
www.tce.name

Cultural economics is the study of how we interact with economic events and conditions. Culture, in this sense, includes our political systems, religious beliefs, psychology, history, customs, arts, sciences, and education. The term "Economics" refers to the extent and process of how we employ capital, labor and materials. If human existence is dynamic, then economics – as a science – must be able to characterize the interaction of culture and economics in contemporaneous terms.

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