Ben Bernanke: Economy Is Headed 'Off The Cliff'

Former Federal Reserve Board Chair Ben Bernanke earned widespread praise for his deft handling of the 2008 financial crisis, applying lessons from economic and financial history to avert a general economic meltdown. Right now, he's alarmed by the combination of a $1.5 trillion tax cut and a $300 billion increase in federal spending, warning that this is "a stimulus at the very wrong moment," because, as he also was quoted by Bloomberg, "The economy already is at full employment." He expects the impact of this stimulus to run its course by 2020, after which time he predicts the U.S. economy "to go off the cliff."

Recessionary Signal

Today, Wednesday June 13, the Federal Reserve is widely expected to announce an increase in interest rates. What impact this may have on GDP growth for the second quarter and beyond remains to be seen. However, the spread between short and long interest rates already is the narrowest in more than a decade, The Wall Street Journal reports. A rate hike by the Fed would bring the debt markets closer to an inverted yield curve scenario, wherein short-term rates are higher than long-term rates, and that is a historically reliable indicator of an upcoming recession. The Journal notes that the yield curve last inverted in 2007, right before the last recession.

Heating Up

The unemployment rate was 3.8% in May, equaling the lowest level in nearly five decades, Bloomberg notes. Meanwhile, the Federal Reserve Bank of Atlanta projects GDP growth at a torrid annualized pace of 4.6% in the second quarter of 2018, up significantly from 2.3% during the same period in 2017 and from 2.2% in the first quarter of 2018, per CNBC.

The Atlanta Fed is at the optimistic end of the spectrum, CNBC adds, with its own poll of economists delivering a consensus forecast of 3.7% growth in the second quarter, while the Federal Reserve Bank of New York is estimating 3.1% growth. Meanwhile, CNBC quotes master investor Warren Buffett as saying: "It's feeling strong. I mean, if we're in the sixth inning, we have our sluggers coming to bat right now."

Cooling Off

Bernanke said that the stimulus "is going to hit the economy in a big way this year and next year," before fading in 2020.

Year U.S. GDP Growth
2017 2.6%
2018 3.3%
2019 2.4%
2020 1.8%

Source: Congressional Budget Office (CBO) as reported by Bloomberg.

The CBO forecast was released in April. Bernanke suggested in his remarks that the impact of the stimulus could be extended if Congress revises the spending plan to smooth it out over a longer time period. Other economists suggest that, if the stimulus spurs capital investment and an upgrade in the workforce, these factors also could lengthen the positive effects, Bloomberg adds.

'Stealth Slowdown'

"There is a stealth [economic] slowdown already happening," as Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, told CNBC on May 21. "Since late last year, consumer spending growth has been easing, as has personal income growth," he said. But he also finds that "Spending is outpacing income growth," meaning that consumers are piling up debt and thus will get squeezed by rising interest rates. Stephanie Pomboy, founder of economic research firm Macromavens, warned earlier this year that exploding household debt presents a key risk for the economy and the stock market. (For more, see also: What Will Trigger the Next Stock Market Crash.)

Too Much of a Good Thing

The latest OECD Economic Outlook report, dated May 30, sticks to the global GDP growth forecasts of 3.8% in 2018 and 3.9% in 2019 that it released in March. Its growth projections for the U.S. are 2.9% in 2018 and 2.8% in 2019, coming off its own estimate of 2.3% for 2017. The cumulative U.S. growth projections by the OECD and the Congressional Budget Office (CBO) for 2018 and 2019 are equal, at 6.5%.

While optimists have pointed to strong coordinated worldwide economic growth as a highly positive development, research by HSBC indicates that this may be too much of a good thing. Specifically, each time this has happened since 1990, a serious, sudden economic shock has followed. (For more, see also: An Economic 'Shock' Could Derail the Bull Market.)

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