House Vote Fuels a Perfect Storm for a New Recession

There are three reasons why a perfect storm for a new recession is developing rapidly.  Number one, the economic recovery is losing steam and the economy is meandering forward rather than growing energetically.  Number two, the law of averages regarding the typical time that an economic recovery lasts is almost at our doorstep.  Number three, the US House of Representatives decided once again that it’s time to play political football with the financial health and stability of the economy.

Any one of these factors alone might be enough to tip the economy over the edge, but the three together is the perfect storm for a new recession.

It has been about 4 ½ years since the Great Recession ended.  Based on the law of averages that has prevailed since World War II, we have less than six months before the onset of the next recession.  In other words, since 1945 we have experienced 11 recessions and 11 expansions. On average, the expansions have lasted four years and 11 months.

Perhaps you are a skeptic who believes that averages are nothing more than middle points around which values fluctuate.  As such, you are not really concerned about the length of time the economy has been in recovery mode.

No problem! Since you are a realist, consider the following developments that occurred just last month: the decline in the unemployment rate was a mathematical illusion brought on by the fact that for every new job that was created, two people dropped out of the labor force; domestic oil prices spiked up again cutting deeply into consumer spending; retail sales plunged; housing starts and auto sales were flat while new home sales declined significantly; new orders for manufactured goods declined sharply  and consumer confidence dropped modestly.

These negative trends have persisted for three months, which is the main reason why Fed Chairman Bernanke decided not to put the brakes on quantitative easing.

As if the economic trends are not bad enough, on Friday the House of Representatives poured salt on the nation’s economic wounds. It passed legislation that will put a roadblock in the path of its financial stability and perhaps even lead to a further downgrade of America’s credit rating.

We have exactly 7 more days before the end of the fiscal year and the budgeting authority of the Treasury Department runs out. Unless Congress passes a continuing resolution, the government will shut down.  Rather than addressing this issue directly, The House of Representatives decided to take the opportunity to play political football.

It passed a bill that would continue funding the government but gut funding for the Affordable Care Act (commonly referred to as Obamacare).  Since the Senate will most certainly overturn this bill and the President has promised to veto it, there is no chance at all that it will pass.  So the net result of the political maneuvering has been to leave the nation with even fewer days to come up with a political strategy to fund government operations.

Worse still, the country has until mid-October before it reaches the debt ceiling – the point at which it runs out of money to pay holders of US treasury bonds, i.e. defaults. This almost happened twice in recent times; once in 2011 when the political wrangling was so ridiculous it led Standard & Poor’s to downgrade the nation’s credit rating from AAA.

It happened again at the end of 2012. Then Congress put in place the budget sequester, i.e. a $986 billion funding cap that has led to across-the-board cuts in government spending.  Most people have forgotten about these cuts completely, except when they have to stand in long lines at airport security checkpoints. The persons who have not forgotten about them are the poor, who have been hard-hit by deep cuts in nutrition, housing and educational programs for low income families.

By playing politics with the financial health and stability of the country, Congress continues to relinquish America’s role as the world’s leading economic power. If it does not change its behavior, Congress will soon inherit an economy whose mediocre performance matches its own.