Despite the bad economic data rolling out in the U.S., most Americans do not believe the U.S. will enter a recession in 2016. But the fact of the matter is that parts of the U.S. are already in a recession and others are on the precipice. While the whole country may not enter a recession in 2016, that’s little comfort to those living in the states that are in a recession. Unfortunately, large pockets of the U.S. could be in a recession later in 2016, as the slow-motion U.S. economic collapse catches up with underwhelming equity markets.
Calls for a U.S. Recession in 2016 Increasing
After years of intervention by the Federal Reserve with artificially low interest rates and an aggressive $3.5-trillion bond-buying program, few could imagine the U.S., the world’s biggest economy, could slip back into a recession.
With weak economic data coming out from every corner of the world, many economists were expecting the U.S. (and by that they mean U.S. consumers) to save the global economy. But forecasts of a U.S. recession have only intensified.
In December 2015, economists had put the odds of a U.S. recession at 15% during the next two years. Fast-forward just one month and it seems the likelihood the U.S. will enter a recession in 2016 is getting stronger. (Source: “Economists see 20% chance of US recession,” The Financial Times, January 31, 2016.)
At the end of January, global economists pegged the chance of the U.S. entering a recession in 2016 at 20% and said it was looking less likely the Federal Reserve would continue to raise rates this year.
But hey, those are economists. What do they know? Not much, actually. They’ve been sorely optimistic the last couple of years. Even these calls for a U.S. recession seem a little light when you factor in all the domestic and international economic news rolling in.
Now the banks, on the other hand, they’re only slightly more pessimistic. Bank of America sees the odds of the U.S. slipping into a recession over the next 12 months to be 25%. It also said there is a 40% chance the Fed will have to either stop raising rates or even cut rates before the end of 2016. (Source: “BofA: Market sees 50-50 chance of recession,” CNBC, February 17, 2016.)
4 U.S. States Already in a Recession
All of this prognosticating is already a moot point for those Americans living in states that are already in a recession. Four states—Alaska, North Dakota, West Virginia, and Wyoming—are in a recession. Three other states are on the cusp. (Source: “The U.S. States Where Recession Is Already a Reality,” Bloomberg, February 21, 2016.)
What’s the common thread among these four states? They are all highly reliant on energy. A 70%+ decrease in oil prices over the last two years has led to lower production and layoffs. Case in point: in 2015, the U.S. added 2.7 million jobs, but North Dakota recorded 18,800 job cuts, West Virginia cut 11,800, and 6,400 jobs were cut in Wyoming.
As mentioned, three other states are at risk of a recession: Louisiana, New Mexico, and Oklahoma. This is in sharp contrast to October 2014, when every state was expanding. Oil and gas–rich Texas is not following the same trajectory because it has a more diversified economy.
But not so diversified that it might not feel serious pain should energy prices remain in the dumps. Slumping commodity prices could send those states heavily reliant on energy and agriculture, like Texas, closer to the edge of a recession.
And there is plenty of reason to think the U.S., or major pockets of it, will enter a recession in 2016, namely with weak gross domestic product (GDP) growth, weak manufacturing data, weak fourth-quarter results, weak fundamentals, and weaker technicals. This is in addition to economic downgrades for the global economy.
All of this is weighing on consumers, who are expected to help the U.S. avoid a recession by taking on additional debt and spending their way to prosperity.
It’s not going to work.