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Hamilton Sees Faster Growth While Odds of Recession Are Higher

Aug. 4 (Bloomberg) -- The U.S. economy will probably gain strength during the second half of the year, while the risk of a relapse into recession has risen, said James Hamilton, an economics professor at the University of California, San Diego.

“More likely than not we will have better growth in the second half of the year than the first half,” Hamilton said today in an interview with Bloomberg Television. “The prospect of getting into recession in 2011 is higher now than I would have said it was at the beginning of the year, but that still doesn’t mean it’s more than 50 percent.”

U.S. gross domestic product grew at a 1.3 percent annual rate in the second quarter, less than economists forecast, the Commerce Department said July 29. Reports this week showed an unexpected drop in consumer spending and slower-than-estimated growth in manufacturing.

“At the moment I’m worried about consumer confidence, business confidence, their spending and the residual effects those are having,” Hamilton said, adding that the debt ceiling debate may have done lasting damage to confidence.

“We may have dodged the bullet from the debt ceiling but I’m afraid we could well have been hit by some of the shrapnel from it,” he said.

Hamilton in his research has explored the idea that measures of economic activity operate differently during periods of economic growth and recession, and that an economy may hit a tipping point and move quickly from one state to another.

Jeremy Nalewaik, a Fed board staff economist, published a paper in April based partly on Hamilton’s research that identified 1 percent growth or less “as a moderately useful warning sign that the economy is in danger of falling into a recession.”

‘Stall Speed’

An expansion at that rate may hit a “stall speed,” or a level of growth low enough that the economy loses its momentum and begins to shrink, he said. The Commerce Department said last week that the economy grew 0.4 percent in the first quarter of the year.

Nine of the 11 recessions since 1945 were preceded by at least one quarter of GDP growth below 1 percent in the year before the recession began, according to Nalewaik’s research.

Still, quarters of such low growth don’t always herald recession. Over the time period of Nalewaik’s study, 25 quarters had growth below 1 percent, with 12 of the quarters preceding a shrinking economy.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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