Has the Recession Already Begun?

Despite Donald Trump’s belief that a single quarter GDP growth of 4.1% is seminal (it’s not, and Obama had four quarters well above that number), and despite his disproven claim about African-American job growth (self-admittedly wrong in a rare Trump correction) and job growth in general, the economy is beginning to shudder and send some ominous signals. Little signs, but disturbing because they represent a genuine reversal from earlier months.

For example, according to iEconomics.com, In July, “Business Confidence in the United States fell to 58.10 Index Points from 60.20 Index Points.” But such a slight shift… can it matter? Consumer confidence, which was flying high is also slipping slightly. It’s not so much the hard numbers as it is the direction change. From up to down. The beneficial impact of the massive corporate tax cut has pretty much been absorbed by the economy, but consumers are now feeling the effects of vicious price increases in healthcare as the Trump administration continues to claw at the Affordable Care Act.

The seeming economic optimism is beginning to waiver, and the negative impact of U.S. sanctions and new tariff barriers are beginning to take down the global marketplace, exacerbated by the U.K.’s flailing at orchestrating a softer post-Brexit landing with the European Union.

As international leaders dig in their heels, particularly in China and Turkey where downturns are quite pronounced, there is hard-dollar blowback against the United States, from the reduction in demand for U.S. goods base on retaliatory tariffs to the raw exposure of U.S. financial institutions who have invested or loaned money heavily into foreign economies that are sliding rapidly downwards as a result of those U.S. economic pressures.

Consumer demand, perhaps negatively impacted by higher prices amplified by higher U.S. tariffs on imports (particularly steel and aluminum), is slackening off. The numbers, as reported by the August 16^th Associated Press, are disheartening:

“Deepening worries about global economic growth, particularly in China, set off a rout in riskier assets including technology stocks, copper and crude oil Wednesday. U.S. retailers took a drubbing after Macy’s reported weaker sales.

“An unexpected drop in profits for Chinese tech giant Tencent surprised investors and added to some recent concerns about the health of China’s economy. Tencent, a gaming and messaging company, is the most valuable tech firm in China. This week, reports on growth in factory output, consumer spending and retail sales in China were all disappointing… Large firms fell, including China’s Alibaba and Baidu and the United States’ Facebook and Microsoft.

“Oil prices sank, and copper plunged to its lowest price in a year as investors worried about the health of the global economy. The Standard & Poor’s 500 index had its biggest decline since late June, while traditionally safer investments such as bonds and high-dividend stocks rose.

“‘This year we’ve seen slower growth. Everyone expected that,’ said Kate Warne, an investment strategist at Edward Jones. ‘Over the last couple of months it looks like growth has been slower than everyone expected.’… The S&P 500 slid 21.59 points, or 0.8%, to 2,818.37. Earlier in the day it was down as much as 1.3%.... The Dow Jones industrial average fell 137.51 points, or 0.5%, to 25,162.41. The Nasdaq composite dropped 96.78 points, or 1.2%, to 7,774.12. The Russell 2000 index of smaller-company stocks sank 21.91 points, or 1.3%, to 1,670.67…

“U.S. benchmark crude slid 3% to $65.01 a barrel in New York. Brent crude fell 2.3% to $70.76 a barrel in London… Copper tumbled 4.5% to $2.56 a pound, its lowest price in more than a year. The metal is considered an important economic indicator because of its uses in construction and power generation. Copper futures have fallen more than 20% since they hit an annual high of $3.30 a pound in early June.

“Macy’s plunged 15.9% to $35.15 after reporting that its sales slowed in the second quarter. Kohl’s shed 5.8% to $74.39. Retailers have struggled for years as investors worried about the growing threat of online shopping options. Wednesday’s [8/15’s] losses interrupted a huge rebound for the stocks in 2018…

“Banks fell because of a sharp drop in interest rates, which makes mortgage and other loans less profitable. High-dividend companies such as utilities and phone companies did better than the rest of the market. Investors often treat those stocks as an alternative to bonds, buying them when yields fall.

“Turkey’s currency stabilized and rose after authorities sought to ease liquidity problems in the banking system. But Turkey imposed $500 million in tariffs on U.S. goods as tensions between the countries increased. There is also no sign that Turkey’s president will let the central bank raise interest rates, which economists say it should do urgently to support the currency.

“Gold fell 1.3% to $1,185 an ounce. Silver fell 4% to $14.45 an ounce… Wholesale gasoline fell 1.8% to $2 a gallon. Heating oil fell 1.8% to $2.09 a gallon. Natural gas slipped 0.6% to $2.94 per 1,000 cubic feet… The dollar fell to 110.57 yen from 111.22 yen. The euro rose to $1.1346 from $1.1339.”

The reality is that none of this seems particularly dramatic, and we should expect some remaining up and down movement by a market confused by all the of operating variables. But underlying downward vector is clearly visible, and it would take very little to send markets tumbling. A sharp rise in interest rates from the Fed, for example. A panic reaction to the U.K.’s Brexit woes. Continued consumer price increases coupled with the fact that most Americans are locked in a moribund economic reality. For 70% of us, we are at the same or lower buying power we were four decades ago. See my August 14^th blog, Real Dollars: Stagnation!, for the supporting numbers.

Nothing brings this reality home like the above chart from the Organisation for Economic Co-operation and Advancement, addressing the increasing income inequality within developed countries. Why does this matter for the United States? Because we have the greatest income inequality in the developed world, and most of that polarization has occurred since the recent Great Recession! When most of your consumers cannot buy more, because their inflation-corrected earnings do not make up for their parallel increases in the cost of living, who exactly is going to buy those all the products made by all those rich folks?

Most economists see a slowdown coming. The optimists think the market will hold well into 2020. The pessimists think the downward slide has already begun. The optimists and those in the middle see a course correction but predict the adjustment will not be pronounced. Since over 70% of the U.S., economy is consumer-driven, I think that both the stock market is seriously over-valued (thanks in part to the impact of the corporate tax cut which unleashed new dividends and stock-buybacks but did little to improve core business efficiencies) and that the housing market is now priced way beyond normal affordability indexes. I expect a bit worse.

I’m Peter Dekom, and while the next recession has not yet arrived, it is sending its advance-men to announce its impending arrival.