Recession Has Arrived in Four U.S. States
The U.S. Federal Reserve is contemplating another rate hike, citing improving economic indicators. However, the reality is quite the opposite. There are signs that suggest that we might be in for another U.S. recession in 2016, which could only worsen with another rate hike.
The recent rout in commodity prices remains the biggest culprit. It was expected that lower gas prices would save consumers some extra dollars. This extra purchasing power added to consumers’ pockets would then translate into higher consumer spending. Consumer spending would drive down inventories, pushing production higher and ultimately boosting economic activity.
That’s Econ 101. Anybody with a basic understanding of the economy could predict this, but the reality isn’t quite so simple. The U.S. economy has become increasingly unpredictable, where practice constantly refutes theory. This is exactly what happened this time.
Case in point: consumers are not spending. Big-box retailers are posting yet another quarter of slow sales. From grocery stores to specialty retailers and drugstores, big U.S. retailers are reporting lackluster results for the last quarter of 2015.
So far, retailers like Wal-Mart, Target, Nordstrom, Dollar General, and Macy’s have reported fourth-quarter results. All of these have either missed on Street estimates or have delivered soft guidance for future quarters.
Target has turned out to be the biggest disappointment. This retailer was expected to deliver the best results in its category on the back of strong holiday sales. Instead, it missed on both earnings and revenue. The situation is alarming.
In fact, if you look at the inventory-to-sales ratio for U.S. businesses, you’ll be surprised to find out that the ratio has now hit its highest level since the Great Recession. In other words, shelves are loaded, but there aren’t enough buyers. (Source: “U.S. inventory-to-sales ratio hits highest level since 2009,” Reuters, February 12, 2016.)
Furthermore, take a look at the S&P Retail Index ETF (NYSE:XRT). Retail stocks began losing their moment through the end of last year. This is about the same time that consumer spending started shrinking.
Chart courtesy of www.StockCharts.com
Wait! There’s more!
The severity of the matter will become more obvious to you when you see Moody’s latest analytics on the U.S. economy.
According to Moody’s, we have already entered a recession. So far, four U.S. states have been hit and three more are on their way. Alaska, North Dakota, West Virginia, and Wyoming are in a recession right now, while Louisiana, New Mexico, and Oklahoma are the next states at risk. (Source: “The U.S. States Where Recession Is Already a Reality,” Bloomberg, February 22, 2016.)
These dire indicators are too compelling to ignore. One won’t be wrong to predict at this point that the U.S. economy is on the brink of another U.S. recession.
Worse yet, if the Fed goes for another rate hike, they will further stall consumer spending. The move may even trigger a U.S. economic collapse in 2016.