Re­ces­sion, Again?

Global warn­ings of a re­cov­ery run­ning down

The Washington Post Sunday - - BUSINESS - BY YLAN Q. MUI

Con­fronted with dis­ap­point­ing data from around the world, econ­o­mists are whis­per­ing a word that hasn’t seemed like a real pos­si­bil­ity in years: re­ces­sion.

It starts with the slow­down in China, which is al­ready strain­ing the global re­cov­ery. The world’s sec­ond-largest econ­omy has lost its ap­petite for the raw ma­te­ri­als that fu­eled its in­dus­trial boom, leav­ing high and dry the smaller coun­tries that sup­plied it with resources. Slower growth abroad trans­lates into weaker for­eign cur­ren­cies and a stronger U.S. dol­lar, which makes Amer­i­can goods harder to sell in the global mar­ket­place.

A grow­ing cho­rus of prom­i­nent econ­o­mists and an­a­lysts are warn­ing that those dy­nam­ics could tip the world — and the United States along with it — into re­ces­sion within the next two years. The fear is show­ing up in re­cent wild swings in the financial mar­kets, gen­er­ally rare out­side broader eco­nomic down­turns. The pace of U.S. job growth has slowed sub­stan­tially com­pared with last year. And al­though the eco­nomic ex­pan­sion has yet to reach many work­ers, it has ac­tu­ally lasted longer than the post­war av­er­age and may be show­ing signs of fa­tigue.

“The global econ­omy is un­com­fort­ably close to the edge,” said David Stock­ton, se­nior fel­low at the Peter­son In­sti­tute for In­ter­na­tional Eco­nom­ics.

In ad­di­tion, the fi­nal months of the year are a po­ten­tial mine­field for the U.S. re­cov­ery: Congress has to raise the na­tion’s bor­row­ing

limit be­fore Nov. 3 to avert a cat­a­strophic de­fault. Law­mak­ers also need to ap­prove a bud­get for the fed­eral gov­ern­ment or face a con­fi­dence-sap­ping shut­down. A wrong move by the Fed as it weighs whether to raise in­ter­est rates this year could stymie the econ­omy’s mo­men­tum.

Most an­a­lysts still be­lieve that the most likely sce­nario has the coun­try con­tin­u­ing to chug along: Congress reaches an eleventh-hour com­pro­mise. The na­tion’s cen­tral bank main­tains its bal­anc­ing act. And the U.S. re­cov­ery is rat­tled but not de­railed by in­ter­na­tional tur­moil. Cur­rent es­ti­mates of eco­nomic growth hover around a slug­gish 1 per­cent an­nual rate, and though ex­pec­ta­tions for next year have been low­ered re­peat­edly, they re­main pos­i­tive.

But econ­o­mists say those fore­casts, which are by na­ture un­cer­tain, are par­tic­u­larly murky now. This week, China re­ported that its econ­omy grew at a 6.9 per­cent an­nual rate over the past three months. That’s far faster than U.S. growth but still the slow­est pace since 2009 and shy of the gov­ern­ment’s tar­get of 7 per­cent.

Many an­a­lysts say the of­fi­cial Chi­nese num­bers are too rosy. In that coun­try’s crowded ci­ties, high-rise apart­ment build­ings sit va­cant, and fac­to­ries stand idle af­ter sat­u­rat­ing the global mar­ket­place with cheap goods. Out­side econ­o­mists be­lieve that the coun­try’s growth rate may be as low as 3 per­cent, and the un­cer­tainty makes fore­cast­ing the rip- ple ef­fects even more pre­car­i­ous.

China ac­counts for only a tiny sliver of U.S. ex­ports, but its in­flu­ence is far wider. The slow­down in China has been push­ing down oil prices just as Amer­ica’s pro­duc­tion was peak­ing.

Mean­while, coun­tries such as Brazil and Aus­tralia that once boomed by ex­port­ing raw ma­te­ri­als to China are suf­fer­ing a re­ver­sal of for­tune as com­mod­ity prices plunge. As growth slows, their cur­ren­cies are weak­en­ing against the dol­lar, which, in turn, makes U.S. ex­ports more ex­pen­sive and drags down the re­cov­ery here.

That com­pli­cated eco­nomic web has plenty of room for a sur­prise — a big­ger con­trac­tion in China, a sharper rise in the dol­lar, a more dra­matic slow­down in hir­ing at home — that could re­verse the progress the U.S. re­cov­ery has made.

“Eco­nom­ics isn’t rocket sci­ence, and even rock­ets fre­quently land in the wrong place or ex­plode in mid-air,” wrote Willem Buiter, chief global econ­o­mist at Cit­i­group, who as­signed a 55 per­cent chance to the prospect of a mod­er­ate to se­vere global con­trac­tion next year.

Since World War II, re­ces­sions, on av­er­age, have been spaced about five years apart. The cur­rent ex­pan­sion is more than six years old, hav­ing be­gun in July 2009. A re­ces­sion is gen­er­ally de­fined as two con­sec­u­tive quar­ters of con­trac­tion, but an of­fi­cial des­ig­na­tion is of­ten not made un­til long af­ter the de­cline has be­gun.

The Great Re­ces­sion started in De­cem­ber 2007 but was not of­fi­cially di­ag­nosed un­til a year later — af­ter the Dow Jones in­dus­trial av­er­age had fallen about 40 per­cent and more than 3.5 mil­lion work­ers had lost their jobs.

A com­mon re­frain in eco­nom­ics is that ex­pan­sions do not die of old age. Rather, they are vic­tims of pol­icy de­ci­sions, such as the Fed in­ter­est rate hikes in the early 1980s to tame dou­bledigit in­fla­tion, or of un­ex­pected shocks, such as the im­plo­sion of the sub­prime mort­gage industry.

But the spring of 2001 may of­fer a more use­ful com­par­i­son to the cur­rent sit­u­a­tion. The coun­try faced weak growth abroad and the fall­out of the dot-com bub­ble, but only 15 per­cent of econ­o­mists sur­veyed that sum­mer be­lieved a down­turn had be­gun, ac­cord­ing to Blue Chip fore­casts.

Yet the na­tion was in the midst of a re­ces­sion that lasted nine months. The down­turn was rel­a­tively shal­low, and in the af­ter­math of the Sept. 11 ter­ror­ist at­tacks, then-Pres­i­dent Ge­orge W. Bush quickly pro­posed a stim­u­lus pack­age that de­liv­ered tax re­bates to ev­ery house­hold.

“A re­ces­sion is in­evitable in the full­ness of time. The ques­tion is when is one likely to oc­cur?” said Ja­son Thomas, di­rec­tor of re­search at the Car­lyle Group, a financial ser­vices and pri­vate eq­uity firm.

Thomas said he doesn’t be­lieve that one is im­mi­nent. But the more im­por­tant ques­tion, he said, is how dam­ag­ing one would be if it did oc­cur. Most econ­o­mists, in­clud­ing Thomas, be­lieve that the next re­ces­sion is likely to be mild. The prob­lem is that the na­tion’s top pol­i­cy­mak­ers may have less power to com­bat it.

If any­thing, an­a­lysts worry that of­fi­cials in Wash­ing­ton will be the ones who send the econ­omy over the edge. Bit­terly di­vided law­mak­ers have no clear plan for avert­ing a cat­a­strophic de­fault on the na­tion’s debt obli­ga­tions next month or a shut­down of the fed­eral gov­ern­ment in De­cem­ber. The hur­dle for any stim­u­lus pack­age may be in­sur­mount­able.

An­other back­stop dur­ing the most re­cent financial cri­sis was the Fed. The na­tion’s cen­tral bank slashed its key in­ter­est rate to zero in De­cem­ber 2008 and has since pumped tril­lions of dol­lars into the econ­omy. Seven years later, rates are still at zero, and the Fed has main­tained a $4.5 tril­lion bal­ance sheet. In other words, most of the cen­tral bank’s arse­nal is al­ready de­ployed.

In an in­ter­view, former Fed chair­man Ben S. Ber­nanke said that if a re­ces­sion was to strike, the cen­tral bank could re­sume pump­ing money into the econ­omy, prom­ise to keep in­ter­est rates at zero even longer or even turn them neg­a­tive — es­sen­tially dou­bling down on the ex­per­i­men­tal poli­cies from which of­fi­cials have been try­ing to ex­tri­cate the econ­omy.

“They’re not, on the whole, a su­per-at­trac­tive set of op­tions,” Ber­nanke said. “So you would hope first that you avoid that sit­u­a­tion.”

But for many Amer­i­cans, the dif­fer­ence be­tween re­cov­ery and re­ces­sion is blurry at best. The na­tion’s la­bor force has shrunk to the low­est level since the 1970s, partly be­cause many peo­ple have given up look­ing for work. The num­ber of peo­ple work­ing part time even though they would pre­fer full-time jobs re­mains well above the pre-re­ces­sion level.

Per­haps most im­por­tant, wage growth has re­mained stuck at about 2 per­cent, de­spite a drop in the un­em­ploy­ment rate and a pickup in hir­ing.

Georgia res­i­dent Dawn O’Neal said she is mak­ing less now than she did 15 years ago when she started her ca­reer in early child­hood ed­u­ca­tion. At 48, she is paid $8.50 an hour and be­lieves that the min­i­mum wage should be raised to $15. At the very least, she said, she shouldn’t be mov­ing back­ward.

“Peo­ple who work ev­ery day, peo­ple who work 40 hours a week need to get paid what they de­serve,” O’Neal said. “They shouldn’t have to worry about strug­gling or sur­viv­ing.”



An oil drill in Ok­la­homa, a sig­nif­i­cant pro­ducer of oil and gas. The slow­down in China has pushed down oil prices just as Amer­i­can pro­duc­tion was peak­ing, forc­ing the industry to shed jobs — an­other ex­am­ple of China’s broad in­flu­ence on the world econ­omy.

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