Recession: Simple Reason Why It Could Be Here By End of 2016

RecessionThe U.S. economy is stalling and a recession by late 2016 or early 2017 is a strong possibility.

The Bureau of Economic Analysis (BEA) reports that the U.S. economy grew at an annual pace of 1.2% in the second quarter of 2016. At the same time that it reported second-quarter 2016 growth, it also revised first-quarter growth downward from 1.1% to 0.8%.

The chart below shows the year-over-year change in quarterly U.S. gross domestic product, commonly referred to as GDP.

Real Gross Domestic Product

Source: Federal Reserve Bank of St. Louis, last accessed August 3, 2016

Notice the trend since the first quarter of 2015? Economic growth in the U.S. economy has been decelerating since then. (A recession is technically defined as two consecutive quarters of negative GDP.)

I believe the declining economic growth the U.S. is experiencing will continue for one major reason: consumer spending, which makes up two-thirds of the U.S. economy, is in bad shape. I expect consumers to continue pulling back on spending.

The chart below shows the inventories-to-sales multiple of all businesses in the U.S. economy.

At the very core, when this multiple declines, it means businesses are keeping their products “off the shelves” because consumers are buying their goods. Conversely, when the inventories-to-sales multiple increases, it means companies are stockpiling more inventory because sales are soft.

Inventories-To-Sales Ratio

Source: Federal Reserve Bank of St. Louis, last accessed August 3, 2016

The chart above is frightening. It says consumption in the U.S. economy is at its lowest level since 2009—that was just after the last recession.

What Happens If U.S. Economy Enters Recession?

What happens if the U.S. economy goes into a recession in late 2016 and early 2017? Will the Federal Reserve be able to do something about it? Yes, it could.

Sure, the Fed has exhausted all the traditional tools it has to revive the U.S. economy. However, it could follow in the footsteps of the Bank of Japan or the European Central Bank (ECB) and go negative on interest rates while printing even more new paper money.

Should our central bank adopt any of the actions described above, the price of gold bullion could easily move to the $2,500-an-ounce level. I have been talking about the opportunity in the shares of quality gold miners for at least three years now. I continue to see them as attractive at their current price levels as a recession could be exactly what they need to push them even higher.