U.S. Economy: Four Reasons Why the Recession Is Already Here

U.S. EconomyYesterday, we learned the U.S. economy grew at only half a percent in the first quarter of this year—its worst performance in two years. Truth be told, dear reader, the U.S. economy is already in a recession with many economic indicators confirming this.

Let’s start with a chart of the inventories-to-sales ratio. The ratio measures the buildup of inventories at businesses in the U.S. compared to sales. In times of recession, this ratio spikes higher, as business inventories build and sales plunge. As it stands, the inventories-to-sales ratio is pretty much saying we are in a recession.

Inventories to Sales Ratio

Source: Federal Reserve Bank of St. Louis, last accessed April 27, 2016.

Another indicator suggesting the U.S. economy is in a recession is the value of new orders at consumer goods manufacturers. Look at the following chart and let me explain why it’s important.

New Orders for Durable Goods

Source: Federal Reserve Bank of St. Louis, last accessed April 27, 2016.

The amount of new orders for durable goods received by manufacturers in the U.S. has been seeing month-over-month declines since February of 2015—that’s 13 months in a row.

Why does this matter? The U.S. economy is a consumer-based economy. If consumers spend more, the economy improves. Now, if manufacturers are getting fewer orders, it pretty much says consumer spending is weak.

Lastly, look at consumer sentiment. In the simplest terms, if consumers are pessimistic, they spend less.

consumer Sentiment INDX

Chart courtesy of www.StockCharts.com

As you can see from the University of Michigan Consumer Sentiment Index above, consumer sentiment has been in a decline since the beginning of 2015. Historically, whenever consumer sentiment has plunged, a recession usually follows.

U.S. Economic Outlook for 2016 and Beyond

Dear reader, I don’t want to be the bearer of bad news, but the data just doesn’t look good. What I have mentioned above is just the tip of the proverbial iceberg. A lot of other indicators say the same.

For example, for the first quarter of 2016, the estimated earnings decline for S&P 500 companies is now a whopping negative 9.1%! (Source: “Earnings Insight,” FactSet, April 8, 2016.) This marks the first time the S&P 500 has seen four consecutive quarters of year-over-year declines in earnings since 2008!

When companies are piling up inventories because of weak sales, when new orders for goods at manufacturers are plummeting, when consumer sentiment is falling, and when the S&P 500 companies are experiencing declining earnings for four quarters in a row, we are in a recession.