The US is headed for recession – if 63 years of economic data are any guide to the future

Think the US is out of the woods now that congress has come to an agreement on the debt ceiling? Not according to this chart from Rich Yamarone, an economist at Bloomberg. It’s called the “2 percent rule”. When US GDP falls below 2%, it usually means the world’s largest economy is headed for a recession.

Last week, we received confirmation that US GDP was just 1.6% in Q2 2011. Combined with yesterday’s much weaker than expected ISM report and an unemployment rate at 9.2% , it suggests that the US Federal Reserve won’t be in any rush to hike interest rates this year. Fed Governor Ben Bernanke may even be warming up the printing press (as Mike alluded to here) if US employment and growth outcomes don’t start to improve – and quickly.

Discuss Article

  1. Jeremy Dufton says:

    From your own chart, while the rule may have held last time it happened, on the three previous occasions in the last 10 years or so that GDP growth dipped below 2%, the US did not go into recession. Don’t go looking for ‘meltdown’ with such glee, chaps!

    Posted on: 02/08/11 | 11:44 am
  2. Ahmed Mahar says:

    To be “officially” in a recession its deemed that there are two successive quarters of negative growth here. In the periods around 1970 and 2001 this was not the case, as this US still experienced positive growth. So the 2% rule already fails to hold true.

    Please correct me if I am wrong.

    Posted on: 11/08/11 | 2:53 pm
  3. Anthony Doyle says:

    Hi Jeremy, thanks for your comment.

    You’re right, it’s more a guide than a hard and fast rule. Though you have to admit it has a pretty good success rate. The US may not have slipped into recession in early 2007, but it did experience the great financial crisis a mere 9 months later.

    Ahmed, the US has its own rule when it comes to classifying whether it has experienced a recession or not. From wikipedia – “In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is generally seen as the authority for dating US recessions. The NBER defines an economic recession as: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Almost universally, academics, economists, policy makers, and businesses defer to the determination by the NBER for the precise dating of a recession’s onset and end.

    In the periods that you refer to, the NBER classified that the US was in recession. Revisions to the GDP data show that the US did not actually register a fall in growth, though when the GDP print first came out the year on year rate of growth was actually negative. It highlights the difficulties of trying to measure the national accounts.

    On the rule you are referring to, wikipedia notes – “In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules of thumb for defining a recession, one of which was “two down quarters of GDP”. In time, the other rules of thumb were forgotten. Some economists prefer a definition of a 1.5% rise in unemployment within 12 months.”

    Posted on: 16/08/11 | 10:45 am

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