Here’s an updated guide to “where we are”—how the U.S. economy is faring relative to the average of previous financial crises around the world. Though individual details vary, we’re following the script pretty well.
In the graphs of four major indicators that below, the lines marked “average” are the averages of fifteen financial crises in thirteen rich countries since the early 1970s, as identified by the IMF. GDP isn’t shown because the experiences were so varied that the averages were meaningless. But for the indicators shown, the averages do illustrate some tendencies worth taking seriously.
Though the U.S. peaked later and bottomed earlier than the average, and also rose higher and fell harder, the trajectories of the two lines are still remarkably similar. Note that after hitting bottom, employment in the average experience grew very slowly. If we’re in for anything like that average, then we’re likely to see employment growth of only about 35,000 a month over the next year—less than a third what’s necessary just to accommodate population growth. That suggests that we could see an unemployment north of 10% in about a year.
Given the gyrations in energy prices over the last couple of years, reading the headline CPI has been very difficult. But the gyration does seem to be around the average line. And core CPI—for which we don’t have international data—is tracking the average pretty tightly. If inflation follows the script, it should continue to decline into next year. With core inflation at around 1%, it’s reasonable to expect that we could go into mild deflation sometime over the next few quarters.
Rates on 10-year Treasury bonds have fallen harder in the U.S. than in other crisis-afflicted countries, but the trend is typically down for almost four years after the onset of crisis. Further declines in U.S. rates seem like a stretch, but the likelihood of an upward spike looks remote.
Stocks fell much harder in the U.S. than they did in the wake of the average financial crisis, though they did enjoy five quarters of nice recovery. As with interest rates, further declines seem unlikely; in fact, the average increase from here would be around 7% over the next year.
So, all in all, we’re getting pretty much what we might expect out of our major economic and financial variables: a weak, choppy recovery with a deflationary undertow.