I am becoming increasingly concerned about the extent of the slowdown which is now underway in the US economy, a trend which has not yet been fully recognised by the Federal Reserve. Admittedly, some decline in the growth rate was always inevitable at this stage of the cycle, because the large boosts to growth stemming from the upswing in inventories and from fiscal stimulus were certain to lose momentum about now. But the pick up in more sustainable sources of growth, notably consumers’ expenditure and capital investment, has so far been more anaemic than I had hoped, and the improvement in the labour market may be going into reverse. The Fed may soon be forced to confront the choice they most wanted to avoid, which is whether to extend quantitative easing, instead of allowing their programmes of unconventional easing to lapse, as they fervently hoped earlier this year.The tragedy is that voices like that of Paul Krugman who warned of this a year and a half ago were ignored and continue to be ignored.
With the ISM dropping towards the low 50s, initial claims rising, and the number of private sector jobs declining, it seems likely that the Fed will be forced to accept that below trend GDP growth is likely in coming quarters. Previously optimistic private sector forecasters have been downgrading their central case, and the danger of a double dip is coming onto the radar screen. For example, JP Morgan have recently shaved a full percentage point from their US GDP growth forecast for the second half of 2010, taking it down to 1.75 per cent.
No-one yet makes a double dip the most likely course of events in the US. But this is not very surprising, since economic forecasters almost never acknowledge the start of a recession until some months after it has actually taken place. Instead, they talk about “increased risks of recession”. It is interesting to note that both JP Morgan and Goldman Sachs now say that a double dip recession is about 25-30 per cent probable, which is what forecasters generally say when they are becoming really concerned that such an outcome could easily occur.
Policy in the US is still being made by the very people who allowed the financial crisis to occur, the very people who saw no "housing bubble", who assured us that sub-prime mortgage failures would be "contained", and that the fiscal stimulus by Obama was "big enough" and no second stimulus was (or is) needed. These are the very leaders who beat the drums and led the conga line of self-congratulations on a "job well done" as over 14 million Americans became officially unemployed and many millions of others have been banished to statistical "non-existence".