U.S. Recession Hard to Find?

U.S. RecessionDespite a volatile stock market, weak fourth-quarter results, tepid gross domestic product (GDP) growth, and weak global economy, some say it’s hard to find proof the U.S. is headed into a recession. If so, perhaps it’s time to broaden the scope on what defines a recession. It might not feel like there is a U.S. recession on Wall Street, but those on Main Street beg to differ. We may not be in a technical recession, but those companies listed on the S&P 500 are not feeling as exuberant either.

U.S. Recession Hard to Find?

Apparently, some economists are having difficulty relating to the rest of the country. A recent article I found noted that evidence of a U.S. recession is hard to find. In fact, the author suggests that consumer spending, job openings, new unemployment claims, new manufacturing orders, orders for capital goods, and building permits prove the U.S. economy is booming. (Source: “The U.S. Recession Is Hard To Find,” Bloomberg, February 29, 2016.)

If these are the primary indicators pointing to economic growth, perhaps it’s time to broaden the scope on what defines a recession. More and more people are warning of economic weakness—perhaps not an outright recession, but the next best/worst thing.

Choosing his words carefully, William Dudley, president of the New York Fed, said, “At this moment, I judge that the balance of risks to my growth and inflation outlooks may be starting to tilt slightly to the downside.” (Source: “Fed’s Dudley sees risks to US economic outlook tilting to downside,” CNBC, March 1, 2016.)

While he still believes the U.S. economy will limp along at about two percent in 2016, he noted, “I am somewhat less confident than I was before.” (Source: Ibid.) As a result, many believe the Fed will have to hold back before raising interest rates again.

Why the lack of confidence? Perhaps it has to do with everything from the worst start to the year for the stock market and fears of a greater-than-expected slowdown from China and other emerging markets. U.S. presidential candidates have not exactly been championing the U.S. economy either.

U.S. Stocks Pointing to a U.S. Recession

Economists are not exactly known for spotting a recession. Case in point: in 2008, most economists were championing the U.S. economy in spite of weak economic data rolling in. Who wants to bet against the world’s biggest economy? Not those on Wall Street.

The stock market may ebb and flow and go through cycles, but the current cycle is not exactly one for the faint of heart. Stocks are not tumbling because of profit-taking. Investors are not buying on the dips. Why? Because stocks are not putting up good numbers. If you look closely enough, you can see red flags everywhere.

In the recently completed fourth quarter, the blended earnings decline was -3.3%. This marks the first time the S&P 500 has seen three consecutive quarters of year-over-year declines in earnings since the first quarter of 2009 through the third quarter of 2009. (Source: “Key Metrics,” FactSet, February 26, 2016.)

The blended revenue decline for the fourth quarter was -3.9%. This represents the fourth consecutive quarter in which revenue has declined. The last time this happened was when the stock market crashed during the Credit Crisis of 2008 and 2009.

Again, many say the U.S. economy is doing fine. And it may be doing better than most of world. However, the U.S. is not an economic island. The trickle-down effect is in full force. Roughly half of all S&P 500 companies get sales from outside the U.S. and those with more global exposure reported weaker sales and earnings growth in the fourth quarter when compared to those firms with less global exposure. (Source: “Did S&P 500 Companies With Higher Global Exposure Report Lower Earnings Growth in Q4?” FactSet, February 19, 2016.)

During the fourth quarter, S&P 500 companies that get the majority of sales from inside the U.S. reported blended earnings growth of 2.7%. Those that get more than 50% of their sales from outside the U.S. reported a blended earnings decline of -11.2%.

Blended revenue for companies that generate more than 50% of sales from inside the U.S. was a paltry 0.8%. Meanwhile, S&P 500 companies that generate less than 50% of their sales inside the U.S. reported a blended sales decline of -13.0%.

The Dow Jones Industrial Average is throwing up similar numbers. In the fourth quarter, slower economic growth in Europe and the stronger dollar undercut the Dow Jones Industrial Average. (Source: “Dow 30 Companies Continued to Report Sales Declines in Europe in Q4,” FactSet, February 26, 2016.)

Eleven of 30 companies provided revenue numbers for Europe in the fourth quarter. Of these 11 companies, nine reported a year-over-year decline in sales. This is equal to the number of companies that reported a year-over-year decline in sales in the second and third quarters of 2015. That said, for eight of the nine companies, the fourth quarter represented, at least, the third consecutive quarter of year-over-year declines in revenue from Europe.

Yes, this suggests the global economy is frail. And a volatile stock market shows investors remain nervous. They should be. The U.S. is doing well only because the rest of the world is doing poorly. No bell curve is going to make the U.S. look better than it really is.

Red flags abound when it comes to stocks, but what about for the average American?

Signs of a U.S. Recession Not Hard to Find

A recession is hard to find in the U.S.? Maybe on Wall Street it is. And in the Hamptons. But tell that to the 10.5% that make up the underemployed workforce. (Source: “Alternative Measures of Labor Underutilization,” Bureau of Labor Statistics, last accessed March 1, 2016.)

Tell that to the 63% of Americans who don’t have enough savings to cover a $500.00 emergency. If faced with an unexpected expense, a substantial majority of Americans would need to borrow money. (Source: “63% Of Americans Don’t Have Enough Savings To Cover A $500 Emergency,” Forbes, January 6, 2016.)

Or tell it to the 56% of Americans who have less than $1,000 in their checking and savings account—meaning that more than half of Americans are living paycheck-to-paycheck.

How about the 15% of Americans (46.7 million) living in poverty? Incredibly, the U.S. has the sixth-highest hunger rate out of all of the economically developed nations in the Organisation of Economic Co-Operation and Development, or OECD. (Source: “Ben Carson blasted North Korea for spending more on the military than the hungry. Has he looked at his own country?Salon, December 18, 2016.)

The so-called recovery isn’t really helping with wage growth either. Well, it depends on who you ask, I suppose.

Recovery Chart

Overall, it doesn’t look good for hourly workers.

Waning Wage Growth Chart

The stock market, economists, and politicians may be telling us the recession is over. And they may be having a difficult time looking for signs of a U.S. recession—but that’s because they’re looking in all the wrong places.
Most Americans haven’t been privy to the benefits of the so-called recovery. In fact, for most, it’s gotten worse. Signs of the U.S. recession are out there. You just need to know where to look.

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