Don’t buy into the false optimism. While the mainstream media and economists are convinced there’s prosperity, I am concerned the U.S. economy will enter a recession in late 2015 or early 2016.
The simple fact is that consumer spending is the biggest factor driving the U.S. economy, and it is presently experiencing its own recession.
Retail Sales Declining, Store Inventory Increasing
Wholesale sales in the U.S. economy are plummeting, while inventories are rising very quickly—not a good sign.
In January, wholesale sales in the U.S. economy declined 3.1% from the previous month. Meanwhile, inventories increased by 0.3% from December and were up 6.2% from last January. (Source: U.S. Census Bureau, March 10, 2015.)
Without getting too technical, it’s important to follow the inventory/sales ratio at wholesalers. This number gives us an idea about inventory build-up relative to sales. In times of poor conditions in the U.S. economy (and during a recession), this ratio rises as companies stockpile goods they can’t sell. In January of 2015, the inventory/sales ratio stood at 1.27. This is the highest this ratio has been since 2009, when the U.S. economy was still in a recession.
Other Economic Data Is Weak
For February, we were told 295,000 new jobs were added to the U.S. economy. The unemployment rate is now down to 5.5%. (Source: Bureau of Labor Statistics, March 6, 2015.) Hurray, right?
Sadly, there’s too much attention being paid to headline numbers, but not to the details. As regular readers of Profit Confidential know well, the details are where the devil resides. To give you some idea: 30% of all jobs created in February were in sectors like the retail trade and food services areas—in other words, low-wage-paying sectors. This has been the trend for a while now.
Plus, incomes are stagnant. In all of 2014, average hourly wages in the private sector increased by just $0.53 an hour. This translates to $21.20 more per week based on a 40-hour workweek, though the 40-hour workweek is becoming extinct as part-time work prevails. (Source: Federal Reserve Bank of St. Louis web site, last accessed March 9, 2015.) Since we came out of the last recession, hourly wages have barely increased.
Looking at the consumption side of the equation, it’s dismal, too. Consumer spending accounts for two-thirds of the U.S. gross domestic product (GDP). In times of U.S. economic growth, you would expect to see consumers spending more money on things they want, like on durable goods, rather than just the things they need. But this isn’t happening.
In 2014, personal consumption expenditure per capita on durable goods (money spent on goods expected to last longer, like appliances and TVs) grew by 3.5% from the previous year—the slowest pace of durable goods growth since the end of the last recession. (Source: Federal Reserve Bank of St. Louis web site, last accessed March 9, 2015.)
Consumer Spending to Suffer Scrutiny Going Forward
Consumer confidence plays a vital role when it comes to consumption. If consumers feel good about their jobs, their incomes, and their savings, they will go out and spend. Sadly, right now, Americans are worried and are still feeling the impacts of the Great Recession.
In fact, according to a study recently published by Pew Research, 92% of Americans still believe that the jobs market has only partially or hardly recovered. And a very similar number of Americans believe their household incomes have partially or hardly improved since the prior recession. (Source: Pew Research web site, last accessed March 11, 2015.)
Recession in the U.S. in Early 2016?
As I said yesterday, Japan is in a recession, the eurozone is in a depression, Russia is in a recession and getting close to a depression, and China is growing this year at its slowest pace in a quarter-century. A strong U.S. dollar has been punishing American companies that sell abroad. The U.S. will not escape the worldwide economic slowdown.
I understand that my predicting that the U.S. economy could enter into a recession later this year or early 2016 may sound farfetched when the “official” unemployment rate is declining, the Fed is getting ready to raise interest rates, luxury homes are selling like bread and butter, and the stock market is flirting will all-time highs. But I also remember things looking very rosy in 2007, too—just before that last recession got going.