If the blue line showing real GDP growth continues heading downward and crosses the 2% threshold shown by the red line, watch out:
The Atlanta Fed’s David Altig explains:
The bottom line of this chart is that there has been a pretty reliable relationship between sustained bouts of sub-2 percent growth and U.S. recessions (indicated by the gray shaded areas). In fact, over the entire post-World War II era, periods in which year-over-year real GDP growth below 2 percent have been almost always associated with downturns in the economy.
He adds “A pick-up in economic growth in the third quarter is important, as it would help to relieve the anxiety associated with this picture.”
The Fed is expecting a turnaround in the third quarter, but as David Leonhardt says:
Government officials, especially those at the Fed, have proven too optimistic again and again throughout the crisis. In recent months, they have been saying that they didn’t need to take further action because the economy would soon heal on its own. What do they do now?
As I noted a little over a month ago:
Policymakers have delayed doing more [to help the economy] based upon hope rather than reality — they always see “green shoots” just ahead and use that as an excuse to “wait and see” — and the costs of failing to face reality and take action are now evident. Though we can’t make up for the policy mistakes of the past, there’s still plenty of time to do more to help the unemployed. Policymakers need to realize that unemployment, not the deficit, is the immediate crisis to be addressed and take action. Unfortunately for the unemployed, that’s unlikely to happen.
The White House and Congress are devoting all of their energy to deficit reduction rather than job creation. As highlighted by yesterday’s horrid jobs report, and the fact that deficit reduction will place an additional drag on the recovery, that’s something they may come to regret.
This post originally appeared at Economist’s View and is reproduced here with permission.