Recession: Three Reasons Why 2016 Will Be Bad for the Economy

recessionHere in late 2015, almost each passing day, we get data suggesting the U.S. economy is headed towards a recession in 2016. Of biggest concern is consumer consumption, also known as consumer spending, which makes up two-thirds of U.S. gross domestic product (GDP).

The chart below, courtesy of the Federal Reserve Bank of St. Louis, shows the year-over-year change in consumer spending on durable goods. These are items that are expected to last long, like furniture and appliances. As the chart clearly shows, since the beginning of 2015, consumers have been cutting down on the amount of money they spend on durable goods.

This isn’t the only statistic that suggests a recession could be inevitable in 2016. Inventory buildup at manufacturers, wholesalers, and retailers is flashing negative. And consumer confidence is in trouble, too. In November, the Conference Board’s Consumer Confidence Index declined nine percent from October. (Source: Conference Board, November 24, 2015.)

FRED Chart

High U.S. Dollar Putting Pressure on the U.S. Economy

As the Federal Reserve’s talks about raising interest rates in 2015 intensified (and actually happened on December 16, 2015), the U.S. dollar rose in value against all major world currencies.

While the major central banks around the world are either printing money or lowering interest rates (some countries actually have negative interest rates), the Federal Reserve stopped printing money and raised interest rates. This has led to an unprecedented rise in the value of the U.S. dollar, as investors seeking a safe haven for their capital are choosing the U.S. dollar over the precious metals.

But a high U.S. dollar has a negative—it makes our exports more expensive to people outside the United States. The chart below, courtesy of the Federal Reserve Bank of St. Louis, is of net exports into the U.S. economy (simply exports minus imports).

Exports of Goods and Services Chart

The U.S. economy’s export deficit is quickly widening. Why should Americans buy American-made goods when it is cheaper to import them? How can foreigners buy American goods when our dollar makes them so expensive? Either scenario puts pressure on U.S. manufacturers.

U.S. Economic Outlook 2016

Earnings and revenue growth for the S&P 500 companies have been contracting for months and this makes it crystal clear that the economy is in trouble.

Going into 2016, I remain pessimistic about the U.S. economy. I see recessionary pressures building up. I see the stock market (a leading indicator) having spent all of 2015 putting in a major market top—thus telling us that’s it for the U.S. economy.

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