Sometimes the worst part of the economic forecasting I do is the sinking feeling that my predictions will be right. So it came to pass this week with the release of fourth-quarter 2012 data on growth of the U.S. economy. The shrinking of the economy in the fourth quarter by a slight 0.1 percent almost certainly marks a new American recession. Indeed – and we have good data back to World War II – there has been no quarterly decline in gross domestic product on record without a recession.
Last summer, as Europe's economy headed into a recession and U.S. industrial production, retail sales and personal income stalled, I called an imminent recession. Of course given the season, that looked to many folks like politicking. It was not. Things were far worse last summer than the media portrayed them. I was not the one politicking with economic data.
Over the past year the only good news in the economy was continued employment growth, though the rate of growth was barely enough to absorb the demographic growth of labor supply (this was not widely reported). Moreover, a closer look at the composition of jobs would have shown several months in which full-time jobs declined. Labor markets are no better now than they were a year ago, which is to say they are pretty bad.
There is some very tepid good news in housing. In many places prices and sales have rebounded (though nationwide, pending sales were down in the most recent data). This caused an enormous amount of cheer on Wall Street, which experienced a sustained rally. This exuberance occasioned economist Robert Schiller (of the Case-Schiller housing index) to pen a column warning that the housing market was not poised for a rebound. He warned that a lengthy and slow recovery was ahead. Of course, stock performance predicts recessions less effectively than a monkey tossing darts at a wall (really), so there's no need to glean much information from Wall Street.
Sadly, the outlook for early 2013 is worse than that of later 2012. The impact of tax hikes enacted Jan. 2has yet to be broadly felt in the economy. Many of us are just now seeing smaller paychecks due to the payroll-tax increase. One thing is for certain, this will reduce retail sales, personal income and manufacturing production. Federal government spending cuts consistent with the expected sequester will, by late spring, place much stronger downward pressure on economic activity. I don't think this will be a long recession, but it sure could be.
The déja vu of the European economy is again upon us. The United Kingdom has slid into a triple-dip recession, and Spain, Italy, Greece, Portugal, the Balkans, and France are all seeing a deepening recession.
These data should be a wake-up call to Washington. I have written much about the negative consequences of the extreme uncertainty over tax rates and government spending. We are now in a recession, and the vapidity of leadership has contributed to our plight.