I've written periodically here since the beginning of this year that I expected the U.S. to enter into recession in the second half of 2012. It has not happened, and by any measure it looks highly improbable at this point. A recession may occur in 2013 in conjunction with the fiscal cliff and sequestration issues, but that's a separate issue that I will address at another time.
The genesis of my recession call for this year was that Europe would experience a Lehman-type event that would shock the global economy and that U.S. housing values and sales would again decline as owners rushed to sell ahead of the expiration of mortgage debt forgiveness at the end of 2012.
Neither of these events has occurred.
As with the fiscal cliff and sequestration issues, though, these issues may have an impact next year, and I will address them again at another time.
The negation of these events as substantive economic issues so far is only a part of the story, however. Their failure to become a negative catalyst and drag on economic activity is not the same as being positive.
Three fundamental events have occurred this year that I was not expecting, involving the consumer, business and the government.
On the consumer side, auto sales have been increasing, both new and used. There is nothing new in this, as the re-emergence of subprime auto loans has been driving auto sales for the past three years.
I was expecting, however, that this would wane as European and housing issues affected consumer confidence and spending.
On the business side, the increase in the non-manufacturing ISM report for August and the strength in the individual components are impressive, especially the employment index increasing from 49.3 to 53.8. Both of these indicate growing consumer and business confidence and, more importantly, financial commitments.
The government component really gets to the heart of the matter and is somewhat perplexing too.
The increase in consumer and business confidence this year is occurring simultaneously with federal government expenditures actually contracting over the past three quarters, according to the Commerce Department's Bureau of Economic Analysis.
The fact that the increase in private-sector activity this year more than offsets the decline in federal spending and has so far precluded a recession from occurring is pretty spectacular but not unprecedented.
The last time federal expenditures actually contracted was after the end of the Korean war in 1953. The war's end occurred simultaneously with the beginning of recession in 1953-54 and a contraction in federal expenditures in 1954-55. Throughout that period, U.S. stocks continued to climb.
However, that period was followed shortly by the even deeper recession of 1957-58, and stocks declined broadly by about 20% during that period.
There are multiple problems with comparing the two time periods, too many to address here. But it's important to note that we are experiencing a similar contraction in government expenditures. The winding down of military action in Iraq and Afghanistan is the primary driver of the decrease -- and now the outright contraction -- in federal expenditures.
Looking into the immediate future, the issues with respect to housing and Europe I've discussed in the past continue to loom, in addition to the U.S. fiscal cliff and sequestration.
I will return to these issues -- and the economic trajectory they suggest -- when the U.S. elections have been completed. For the time being, though, recession this year looks to be highly improbable. I was wrong.