Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

U.S. Economy to Enter Recession in Next 12 Months or Less

Monday, April 28th, 2014
By for Profit Confidential

Consumer Spending Telling Us About U.S. EconomyAn economy is said to be technically in a recession when it experiences two consecutive quarters of negative gross domestic product (GDP) growth.

The biggest portion of the U.S. GDP calculation is consumer spending; then comes investments, government spending, and, finally, net of exports. By far, consumer spending is the biggest factor in calculating GDP. All you need is a slight decline in consumer spending for GDP to fall.

And as it stands, consumer spending in the U.S. economy is on the decline. In 2013, it accounted for nearly 70% of GDP, meaning that for every $1.00 increase in GDP, $0.70 was associated with consumer spending.

Since November, consumer spending for durable goods (goods that can last for a long time, like a T.V. or furniture) declined by 3.23%. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 22, 2014.)

When we look at sales at retailers in the U.S. economy, they keep telling the same story: U.S. consumers are tapped out. Of 175 retailers tracked by FactSet, more than half of them have reported store sales in the fourth quarter of 2013 that were below market expectations. (Source: FactSet, April 11, 2014.)

So far, for the first quarter of 2014, 20 of the major retailers have provided negative guidance regarding their sales and only nine have issued positive guidance. For the entire 2014 year, 31 retailers have issued negative guidance about their sales and only 15 have issued positive guidance. (Source: Ibid.)

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There is a clear sign of declining retail sales. In 2011, same-store sales grew by 2.9%; in 2012, they increased by 2.6%; and in 2013, same-store retail sales grew by 1.5%. See the trend? Sales at retail stores grew last year at only half the pace they grew in 2011. The trend of slower sales growth—maybe even negative growth—will continue for 2014.

A recession in the U.S. economy is becoming a very likely scenario. Consumer spending, which is hands down the biggest portion of GDP, is in outright trouble.

If you take out the rally in stock prices that we’ve had since 2009 and look at the cooling housing market, there is not much left of the economy. So, if 2014 is a down year for the stock market, which I’m predicting it will be, the chances of a recession suddenly look very real within the next 12 months or less.

By itself, the U.S. having two consecutive quarters of marginally declining GDP is not a big deal. The problem with it is perception. All we need is for consumers to see the economy going back into a recession and bang, consumer spending will soften even further.

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  • robert corbett

    Mike, I think your recession call is correct. Recessions are job killers and also inflation killers. This is inconsistent with a bullish gold outlook shorter term. I think gold could dip below $1200/Oz due to your pending recession call. Longer term gold may go bullish when the FED once again goes to accelerated money printing in 2015 and 2016. I don't think the shorter term 2014 gold outlook is so great at all.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles