Presidential hopeful Donald Trump predicted the U.S. economy was on the verge of a very massive recession. Trump cited high unemployment and an overvalued stock market as two main factors that will lead the U.S. into a recession. While his recessionary forecast took mainstream economists off-guard, I doubt his economic revelations were a surprise to the average American.
Donald Trump—A Man of the People
Never one to shy away from…anything, Donald Trump surprised many this past weekend when he said the U.S. was on the verge of a “very massive recession.” The Republican presidential frontrunner cautioned that the combination of high unemployment and an overvalued stock market has put the U.S. economy on the precipice of a recession. (Source: “Donald Trump Predicts Massive Recession,” The Washington Post, April 2, 2016.)
On the U.S. jobs front, Trump said unemployment is not at five percent: “We’re at a number that’s probably into the twenties if you look at the real number.”
While Trump didn’t exactly say how he came to that number, it’s fair to say the U.S. unemployment rate is not five percent.
In fact, even by the government’s own measures (U-6) of unemployment, which includes those who want to work but have given up on looking and those who are working part-time because they cannot find full-time work is around 10%. And that number has only come down one percent since March 2015. (Source: “Alternative measures of labor underutilization,” U.S. Bureau of Labor Statistics, April 1, 2016.)
Trump also noted that the stock market is overvalued. Again, brokers and economists may shy away from that claim, but it’s hard to see how a decline in corporate profits and a rally in stocks go hand-in-hand. According to the Case Shiller P/E Ratio, the S&P 500 is overvalued by 63%. (Source: “Cape Ratio,” Yale University web site, last accessed April 4, 2016.)
The ratio is currently sitting at 26.14 (the 10-year average is 16.66). What that means is that for every $1.00 of earnings a company makes, investors are willing to pay $26.14. The only times the ratio has been higher were in 1929, 2000, and 2007. All three instances were followed by a collapse.
U.S. Consumer Confidence Down
It’s not every day that a billionaire can resonate with the average American. But he does. Trump knows what the average American wants to hear. The average American doesn’t share the opinions of those on Wall Street who say the U.S. economy is going strong.
U.S. consumer sentiment fell to a five-month low in March as more and more Americans take a dim view of the U.S economy. According to the University of Michigan’s Survey of Consumers, the final reading on consumer sentiment came in at 91. That represents the lowest reading since hitting 90 in October. Last March, the index stood at 93. (Source: “Survey of Consumers,” University of Michigan web site, April 1, 2016.)
Most Americans don’t see a silver lining either. The index for current economic conditions slipped to 105.6 in March, down from 106.8 in February. Future expectations also dipped in March from 81.9 to 81.5.
The jobs market might look healthy, but most newly minted jobs are part-time and low-paying. On top of that, those who are working full-time have had to make due with stagnant wages. Not surprisingly, fourth-quarter U.S. gross domestic product (GDP) came in at a lackluster 1.4%. It’s starting to look like the first-quarter number will be even worse.
On one hand, U.S. consumer spending is flat. On the other, America’s outstanding credit card debt is soaring. Consumer spending inched up 0.1% in February. One might think that means Americans are spending less and saving more. (Source: “Personal Income and Outlays, February 2016,” Bureau of Economic Analysis, March 28, 2016.)
But in 2015, outstanding credit card debt came in at $917.7 billion, surpassing estimates of $900.0 billion. In 2015, Americans added $71.0 billion to their credit card debt, a 24% increase from 2014. In the fourth quarter of 2015 alone, U.S. consumers added $52.4 billion to their credit card debt. In comparison, in all of 2014, the cumulative amount of new credit card debt was just $57.4 billion. (Source: “2015 Credit Card Debt Study,” CardHub.com, March 7, 2016.)
If you believe Capitol Hill, the U.S. economy is getting stronger. But our spending habits are beginning to mirror the Great Recession. Again, corporate profits are down, stocks are up, and decent jobs are scarce. Maybe Trump is onto something.