If we are right on this, then the unemployment rate, after having a cyclical decline down to 8% or 9%, may be hit with another recession knocking it back up.  So it kind of stays at these high levels instead of coming down to where we want it.

The logic behind this is pretty clear.  The so-called great moderation of business cycles since the mid-1980s, with cycles that have been less dramatic, is over.  Not only is this because of the Great Recession, but especially because of how hard it is going to be to withdraw the stimulus smoothly.  If you withdraw a little too early, the risk of another recession goes way up.  If you withdraw a little too late, the risk of a really surging inflation cycle goes way up. 

The moderation of the business cycle that we’ve enjoyed for most of our lifetimes, over he last 25 years, is unlikely return even if we have great policy moves in the coming years.

Separate and apart from what I just described, the pace of growth of the US economy during each expansion has been falling for decades.  In you combine lower trend growth expansion with higher cyclical volatility, it dictates more frequent recessions. Japan, with a 1% GDP trend growth rate for the last 20 years, has seen four recessions, about one every five years.  On the other hand, China, with roughly a 10% GDP trend growth rate, has seen zero recessions in the last 20 years. 

That really illustrates the points I am making.  Regardless of all the hand waving, those are the hard facts. Our trend growth rate is getting lower and our cycles are getting shorter and more volatile.  We only have to look to the second largest economy in the world, which is Japan, to see that that adds up to more frequent recessions.

This is a recovery.  It’s not going to falter in the first or second quarter and very likely will make it to the second half of next year.  You are going to see broad consumer consumption numbers continue to grow.  Part of that will be accompanied by jobs growth.  This is already happening. 

Underlying that, though, is literally a tale of two worlds.

If you have a job and didn’t lose it during this recession, then you are looking around and you have pent-up demand.  Prices are lower across the board, noticeably so.  That combination means you are going to consume a bit.

If you don’t have a job, you’re not going to do that.

A recent poll made a related point.  If you are earning over $100,000, then your plans are to spend over 50% more than last year.  That’s stunning.  Equally stunning was that if you are making less than $30,000, then you are going to cut your spending by a third.

In a related backdrop, the wealthiest consumers, say those in the top decile of earnings and net worth – and this is not something new – account for almost half of all spending.  The lower 90% account for the other half.  You will see weird things happing in consumer spending.

If you go to Wal-Mart, and they are offering a deal, consumers will buy at the right price.  Discount stores, if they are executing a good business plan, will make the cash registers ring.  At the other extreme, some luxury brands are actually working.  Tiffany’s is actually doing well. 

In the middle there is a big gulf. 

I’m not describing something that is terribly healthy, but, when you add it up, you are going to see consumer spending grow.  When we look at what a business cycle is, at its very base, the classic definition is that you have employment and GDP growth either peaking or troughing to mark the start or end of a recession.  The supplemental information used to break a tie is sales and income.  Those are your big coincident indicators of cycles.  You can’t have a recovery if only GDP is going up.