Why the U.S. Will Fall into Recession Even if the Fiscal Cliff Is Averted
Thursday, November 15th, 2012
By Michael Lombardi, MBA for Profit Confidential
Nowadays, there is a growing fear that the U.S. economy will fall into a recession if the much-talked-about “fiscal cliff” is not averted. According to the Congressional Budget Office (CBO), if the fiscal cliff is not avoided, the U.S. economy will fall into a recession and unemployment will rise to 9.1%. (Source: Congressional Budget Office, November 8, 2012.)
The major credit-rating agencies are also warning the U.S. government to get its act together and come up with a reasonable plan, or an unnecessary recession will become a very likely scenario. Fitch Ratings has even warned that the U.S. may see a downgrade if the lawmakers don’t come to a decision on the fiscal cliff in a timely manner. (Source: Fitch Ratings, November 7, 2012.)
Sadly (and I’m one of the few saying this), even if the U.S. economy works out the fiscal cliff issue, the U.S. will still likely fall into a recession in 2013.
As I have harped about in these pages before, companies in the U.S. economy are experiencing negative sales growth, and their corporate earnings growth is miserable. Whenever we see this phenomenon occur, a recession usually follows.
Companies across the board are reporting weak corporate earnings, and a record amount of companies have shown revenues much less than what analysts predicted. So far this earnings season, of all the companies in the S&P 500 that reported corporate earnings, 60% of them missed their sales estimates. (Source: Bloomberg, November 9, 2012.)
Similarly, for those companies that have provided guidance for the fourth quarter’s corporate earnings, they look worse than the third quarter. (Source: FactSet, October 31, 2012.)
In addition, the global economy has not improved, but deteriorated. The major problems are still present. The credit crisis in Europe is spreading, more countries are falling into recession, Asia-Pacific economies are witnessing growth slowdown, and global trade is slowing.
With all this said, a recession in the U.S. economy is very likely, even if the politicians come to make a decision about the fiscal cliff. Looking at the conditions of the global economy, and the miserable corporate earnings and revenue growth of U.S. companies, it doesn’t require a lot of work to see the conclusion.
In 2009, it was the financial system that caused a recession; now, it’s the forces of a global economic slowdown that will drag the U.S. economy downward once again.
The ripple effects of the eurozone crisis are spreading across the region, and countries are witnessing severe economic slowdown. No, it’s not Greece, Spain, Portugal, or Italy alone; this time around, it’s Germany and France—two of the biggest and the strongest economic powers in the region—that are seeing their economies come under pressure.
The unemployment rate in the eurozone has reached its highest level ever—11.6% in September 2012, up from 11.5% in August. A total of 18.5 million people in the eurozone are unemployed. (Source: Eurostat, October 31, 2012.)
Though Germany’s unemployment rate is much better than the troubled eurozone nations, the country is going through an economic slowdown of its own.
One-third of Germany’s gross domestic product (GDP) comes from industrial production. In September, manufacturing in Germany fell by 1.8 %—the sharpest decline since April. To add further worries, industrial orders fell 3.3% in September from August, while the production of capital goods and intermediate goods fell by 3.5% and 2.2%, respectively, in the same period. (Source: Reuters, November 7, 2012.)
Similarly, France, the second-largest economy in the eurozone after Germany, is witnessing an accelerating economic slowdown. Industrial production fell 2.7% in France. from August to September. This was the steepest drop since January of 2009. (Source: Bloomberg, November 7, 2012.)
The Bank of France has announced that the country may see a contraction in the fourth quarter of this year. It was only three years ago that France struggled out of a recession. The country’s unemployment rate has reached a 13-year high, and the economic slowdown is deepening.
Now for the real question: where are we headed next with the eurozone crisis?
With two major economies in the eurozone experiencing an economic slowdown, you can certainly bet that the entire region will fall into a recession much quicker than previously expected.
What I find intriguing is that the European Central Bank (ECB) would like to take the same route the Federal Reserve took to “solve the crisis”—buying unlimited quantities of “bad debts.” We all know it doesn’t work. The problem at hand is much bigger than just the bad assets. Buying troubled assets from big banks helps big banks with their profits—it doesn’t increase demand for consumer or business loans, nor does it spur consumer spending.
For 2013, I really don’t see things improving for the eurozone. In fact, I see the economies of the eurozone deteriorating further in 2013.
Where the Market Stands; Where It’s Headed:
I know I’m one of the few saying it…
Since 2009, all we have been witnessing with the stock market is a “dead cat bounce” from severely oversold conditions. What we must realize is that there has been no structural improvement to the U.S. economy. Government spending, record-low interest rates, money printing—that’s what has kept the rally alive.
But we are near the end, dear reader. Corporate earnings growth is deteriorating. We are witnessing negative revenue growth, and worldwide, economies are struggling. The government can spend (read: borrow) all it wants. The Fed can print money to its heart’s content. I can’t see government borrowing or central printing getting the U.S. economy on the right footing in 2013.
What He Said:
“Over-built, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in Profit Confidential, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.