U.S. Economy: 3 Reasons Why Recession in 2016 Is Almost Certain Now

U.S. EconomyTo the mainstream, the idea of a recession in late 2016 may sound absurd. But if you pay attention to the economic data and key indicators, they are actually screaming that the U.S. economy is headed toward a nasty recession. In fact, we might already be in a recession.

Please take a look at the chart below of general business conditions in areas covered by the Federal Reserve Bank of New York (blue line) and the Federal Reserve Bank of Philadelphia (red line). Note that the gray shaded area on the chart, which is of the previous recession.

chart of General Business Conditions

Source: Federal Reserve Bank of St. Louis, last accessed June 29, 2016

As you can see, the last time these two indices dropped so far past zero, we had a recession.

Another factor suggesting a recession is possible for the U.S. economy is consumer spending. I can’t stress this enough: Roughly 70% of U.S. gross domestic product (GDP) is composed of consumer spending. If consumers tighten their wallets, the U.S. economy suffers.

Please look at the chart below of the year-over-year change in monthly consumer expenditure.

chart of Year-Over-Year Change in Monthly Consumer Expenditure

Source: Federal Reserve Bank of St. Louis, last accessed June 29, 2016

Over the past few years, the rate of consumer expenditure has continued to drop! As economists, we need to take a look at the trend and not the individual monthly figures. If we look at the trend, things don’t look good.

Finally, capacity utilization of companies in the U.S has been collapsing too. This indicator tells us at what level of activity companies are operating. Right now, this puts a nail in the coffin on the debate about an upcoming recession in the U.S. economy.

The chart below is of the year-over-year change in monthly capacity utilization figures in the U.S. economy. The trend has been straight down since July 2014.

chart of Year-Over-Year Change in Monthly Capacity Utilization

Source: Federal Reserve Bank of St. Louis, last accessed June 29, 2016

What this chart tells us is that U.S. factories are getting further and further away from working at full potential. At the very core, it suggests demand is in a slump. If the capacity utilization of companies continues to decline, at what point do they start laying off staff?

U.S. Economic Outlook for the Rest of 2016

Dear reader, the stock market has become one big trap. Aside from the major tech companies that are actually growing (and increasing profits) and gold stocks, the general market looks like it has put in a huge top in 2015. And the economic data supports stock prices having put in a top.

As I have written before, I see 2016 as the year the stock market starts moving downward and taking a lot of investors with it. So, please exercise caution with your investments at this point in the cycle as the dead cat bounce in stocks that started in the spring of 2008 comes to an end.