The Pause that Refreshes
Short-term data suggests weakness, but this recovery isn't down for the count.
Economic recoveries never move in a straight line. In all 10 U.S. economic recoveries since World War II, GDP growth rates declined close to 50% after the initial rush off the bottom. This slowdown occurred anywhere from two quarters to seven quarters into the recovery, with an average pause occurring at four and a half quarters. In my estimation, we are currently four quarters into the current one.
Following these historical pauses, growth reaccelerated, and sharply. In fact, in four of these ten recoveries, growth demonstrated more gusto after the pause than before it. In two other cases, growth came very close to the old high without exceeding it. In the remaining three cases, growth was lower than before. More importantly, only after the recovery from the 1980 recession did the economy sink back sharply into a so-called double dip. Even then, the dip, sharp recovery, and renewed declines were a result of on-again credit and interest rate tightening that was designed to stop runaway inflation. In other words, it was a strong external force that threw the U.S. recovery back into a recession.
In my opinion, it is the virtuous cycle of more income, more spending, more production, more employment and back to more incomes that keeps most recoveries moving generally upward. That is why I am staying positive on the economy, though acknowledging the short-term data is weakening, and that the headlines are likely to get a little worse before they get better. My GDP growth and inflation forecast of 4% and 3% are still a little high, but I will hold off on pulling them down until I see the first version of the second quarter GDP report at the end of the month.