Economist Don Rissmiller of Strategas Research:
The best characterization of the U.S. economy – based on the current data – still appears to be a “muddle through”. … The problem we see with “muddle through” growth is that it has the seeds of its own demise built in – if we are not seeing fast enough nominal GDP growth to support employment/labor and corporate profits at the same time, the economy remains vulnerable to shocks.
“Muddle-through” is better than “deflationary-bust,” but it is not indicative of an “all clear.” So, despite some better employment data, we remain skeptical that company earnings estimates (which are in nominal dollars) won’t come under pressure, especially if employment is rising because productivity gains are slowing (profit margin pressure). Bottom line, it still looks like a late-business-cycle environment to us.
It is a point I have mentioned many times. Slow growth is often unsustainable. Stagnation often turns into recession.
Research from the Federal Reserve finds that that since 1947, when two-quarter annualized real GDP growth falls below 2%, recession follows within a year 48% of the time. And when year-over-year real GDP growth falls below 2%, recession follows within a year 70% of the time.
It looks like 2012 1Q and 2Q real GDP growth will average less than 2% annualized. And there was only one quarter last year when real GDP grew more than 2%, the final one when it grew 3%. For the year, growth was only 1.7%.
And as to Rissmiller’s point about nominal GDP, or NGDP, look at it this way: If NGDP had grown at its typical 5% or so in 2008-2011, the economy would be some $2 trillion bigger today. And total lost output over those four years is around $6 trillion. And that gap will grow larger this year and probably next year without a spell of faster-than-average GDP growth.