Weak and Vulnerable | The US Economy is Dangerously Close to Another Recesion
Every quarter, the Fed publishes The Financial Accounts Of The United States. This release contains the most comprehensive data about credit and debt in the United States. I believe that credit growth drives economic growth. So I monitor this data closely for signs about which way the US economy might be heading. My conclusion from looking at the latest data is that the US economy remains weak and vulnerable.
As I documented in my most recent book, The New Depression, between 1953 and 2009, every time total credit (adjusted for inflation) grew by less than 2%, the US went into recession. For that reason, I refer to 2% as "the recession threshold". I regularly forecast credit growth by sector to see if total credit growth will exceed the recession threshold and, if so, by how much.
When credit began contracting in 2009, the Fed responded by printing $3.6 trillion through three rounds of Quantitative Easing to keep the economy from collapsing into a depression. QE pushed interest rates down to record low levels and drove up asset prices, fuelling consumption. That allowed the economy to pull out of recession in 2010 even though total credit growth adjusted for inflation did not exceed 2% again until 2014. It expanded by 2.3% in 2014 and by 2.8% in 2015 - but only then because the level of inflation was very low, 1.6% in 2014 and 0.1% in 2015.
I have just updated my forecasts for total credit growth adjusted for inflation out to 2017. My best estimate is that it will expand by 3.1% this year and by 2.0% next year. The 3.1% increase I am forecasting for this year will be the highest rate of increase since 2007. However, that is still quite weak by past standards. For example, between 1953 and 2007, total credit growth adjusted for inflation averaged 5.0% a year; and during the 10 years leading up to the crisis of 2008, it averaged 6.4% a year. Moreover, given that US interest rates are near all time record lows, credit should be expanding by considerably more than just 3.1%.
The US economy is already very weak. During the last three quarters, US GDP expanded at an average (annualized) rate of only 1% a quarter. If credit growth does slow again next year to 2%, as I expect, that could easily tip the economy back into recession - unless the Fed launches another round of Quantitative Easing.
The Fed is currently hinting that it is likely to increase the Federal Funds Rate at its December FOMC meeting. It is possible that it actually will follow through this time, so long as the economic data released between now and then is not too weak. However, higher interest rates would result in even less credit growth than I have forecast; and that would make the chances of recession that much higher.
Should the economy weaken further from here, I believe the Fed would be quick to reverse course. Combined, the Bank of Japan, the European Central Bank and the Bank of England, are now printing the equivalent of half a trillion dollars every three months. No one should be surprised if the Fed joins them by launching QE 4. If the Fed does rejoin the QE Club, it would drive the price of stocks, bonds, property and gold sharply higher.
"To QE or not to QE", that is the question the Fed may once again soon be asking itself. Monitoring credit growth over the next few quarters should help us anticipate how the Fed will answer that question.
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