Some very interesting news (or should I say warnings) to share with my readers today…
If you’ve been reading Profit Confidential for some time now, you know I am predicting a recession in late 2015 or early 2016. A recession is technically defined as two consecutive quarters of negative gross domestic product (GDP). We are almost half-way there (in respect to a recession happening) because we experienced negative GDP growth in the first quarter of 2015. See more on this in my article, “U.S. GDP Contracts in 1Q15; Economy Halfway to a Recession This Year.”
Recession Ahead; Labor Productivity and Inventory-Sales Multiple Flash Red
Now two more important economic indicators are giving credence to my recession forecast: labor productivity and inventory build-up.
In the first quarter of 2015, quarter-over-quarter, labor productivity fell 3.1% after declining 2.1% in the fourth quarter of 2014. To give you some perspective on the importance of this indicator; even during the Great Recession, labor productivity didn’t fall for two consecutive quarters.
The last times labor productivity declined in back-to-back quarters were in the second and third quarters of 2006; just before the U.S. economy entered a recession. (Source: Bureau of Labor Statistics, last accessed June 16, 2015.)
Another important economic indicator is the manufacturing-trade inventory-to-sales multiple. This indicator tells us how many months of sales it takes to sell the inventory that businesses have built up.
In April, as sales at manufacturers fell 2.3% from the previous April, inventories jumped 2.6%, with the resulting inventory-to-sales multiple finishing the month at 1.26. (Source: U.S. Census Bureau, June 11, 2015.) The last time the inventory-to-sales multiple was this high was in the midst of the Great Recession.
Also Read: U.S. Economy to Enter Recession by 2016?
Stocks Already Reacting to a Possible Recession
Dear reader, over the past five years, we have been told over and over again that the U.S. economy is improving. Investors bought into this rhetoric and pushed stocks to the frothy levels they sit at today.
Stock markets, at their very core, are functions of economic and business growth. And as the easy money policies of the Federal Reserve start to dry up (QE has stopped, and interest rates have stopped falling and may start rising in September), the stock market advance that started in March of 2009 has stalled here in 2015.
Please take a look at the chart below of the Dow Jones Industrial Average.
Chart Courtesy of www.StockCharts.com
Stocks trading sideways without a clear direction for an extended period of time (in this case, over six months) is something we haven’t seen for years.
I see nervousness in the stock market rising. Stock prices are too high as measured by many historically proven stock valuation tools. Preserving capital seems the most prudent investment strategy right now.