The US is headed for another recession in 2014

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  • Makin uses historic business cycle trends and other economic indicators to predict the future health of the American economy. His conclusion? A recession in the near future.

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  • If the economy is weakening heading into the third quarter, policy-makers will need to enact policies to prolong expansion and boost the economy.

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  • Unfortunately, with fierce budget resolution talks expected in September and a new round of debt ceiling negotiations likely set for October, Congress may be more contentious than ever heading into fiscal year 2014.

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Four years after the end of the Great Recession, the United States economy is still struggling to get back on its feet. The Bureau of Economic Analysis has released its new real gross domestic product growth estimates. In the second quarter of 2013, the US economy grew at 1.7 per cent and its first quarter growth was revised down to 1.1 per cent from the 1.8 per cent June estimates.

The latest statistics signal the third straight quarter of below 2 per cent growth. Meanwhile, unemployment remains above 7.5 per cent and the short-term - since 2011 - positive trend in the housing sector faltered this June. Despite these numbers, the Federal Reserve and several other private forecasters maintain rosy 2.5 to 3 per cent growth predictions for the second half of 2013 and 2014. But an economist at the American Enterprise Institute boldly makes a very different prediction.

In his new economic outlook, Third time unlucky: recession in 2014?, John H. Makin uses historic business cycle trends and other economic indicators to predict the future health of the American economy. His conclusion? A recession in the near future. Since the last month of recession in June 2009, the economy has seen tepid expansionary growth rates and even suffered two growth declines - one in the first quarter of 2011 when real GDP growth was as low as 0.1 per cent and one in the fourth quarter of 2012 with growth at 0.4 per cent. The fiscal and monetary measures used to avoid negative growth in those periods will not rescue growth a third time, resulting in a 'third-time-unlucky' economic recession by early 2014.

While the prediction of recession may seem premature to some, the numbers speak for themselves. Looking at historic business cycles trends, the report finds the 11 post-Second World War expansion periods to be long – an average of 4.9 years - and varied with the standard deviation of 2.8 years. The extreme variation in expansionary trends sets the current four-year expansion - 4.5 by year-end - well-within the realm of contractionary possibility.

The research also references several key economic indicators that point towards economic slowdown. Employment has averaged near-zero year-over-year growth since the beginning of expansion in July 2009 and unemployment remains high. While the US economy has never receded when housing starts are on the rise, property starts and permits dropped by 9.9 and 7.5 per cent respectively in June.

Retail sales growth, a good proxy for consumption and confidence, slowed in June as consumer uncertainty increased due in part to confusing Fed signaling regarding quantitative easing monetary policy. Early-2013 tax increases and the sequester are expected to create a fiscal drag of 2 percentage points of GDP. Taken together, the outlook appears less healthy than most forecasters predict.

In spite of these signs, few Americans are bracing for recession in 2014. Although the consumer confidence index dipped in July, it still remains near a five-year high. Why are average Americans still feeling confident, if recession is on the horizon? Maybe it is because this post-crisis period has felt more stagnant than expansionary and most people are still expecting the booming economic growth that traditionally follows recession. Or maybe it is just that the signs are still too subtle.

Whatever the case, let us hope that leaders in Washington are paying attention to the subtle warnings. If the economy is weakening heading into the third quarter, policy-makers will need to enact policies to prolong expansion and boost the economy. Unfortunately, with fierce budget resolution talks expected in September and a new round of debt ceiling negotiations likely set for October, Congress may be more contentious than ever heading into fiscal year 2014. The last thing the country needs on the eve of uncertain economic times is political inaction and intractable partisanship. But political inaction and intractable partisanship is unfortunately what we have come to expect from our elected officials.

Brittany Pineros is the program manager of economic policy studies at the American Enterprise Institute

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