The 2% Tipping Point

There’s a little known rule of thumb in the economics world: when the annual growth rate of key U.S. indicators falls below 2 percent, the economy slides into recession in the next 12 months… and more than one of them is flashing red.

Via Bloomberg’s Rich Yamarone,

Real GDP growth was an annual 1.6 percent in the second quarter. It was last at 2 percent in the fourth quarter 2012, down from 3.1 percent in the third. In addition, real disposable personal incomes (0.8 percent), and real consumer spending (1.7 percent) flash warning signs. With GDP, they possess exceptional recession-predicting abilities. The reason is simple: like riding a bike, if you don’t pedal, you tip over.

And we are tipping over…

Industrial production has the weakest history as an indicator, with growth falling below 2 percent on several occasions when the economy has avoided recession. The economics behind this is that the U.S., far from being a factory behemoth, is prone to manufacturing downturns.

Another rarely-cited statistic with excellent predictive qualities is the pace of real final sales of domestic product, which measures the level of goods produced in the economy that are actually sold rather than placed in inventory. The current 12-month pace is 1.6 percent. Alternatively, some economists look to the level of final sales to domestic purchases, which represents GDP less net exports and inventories.

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