Earlier this year, I claimed that we are in a long term multi-year bull market. And I still stand by that, but I think that there is a potential for a small recession starting in the later half of this year. Maybe it will be a correction and simply a blip on the radar – but there are at least three key indicators that you need to pay attention to on the macro-economic level that could indicate tough times are coming ahead.
The bottom line is that the economy is still weak. There are multiple headwinds that the economy is facing, and I think a lot of people are underestimating the impact of them compounded onto the economy of a whole. Here are three areas that I’m concerned about right now:
The first bucket I’m concerned about is consumer spending. Wal-Mart (WMT) posted terrible earnings, and highlighted their concern around weak consumer spending. I wouldn’t be surprised if Target (TGT) and other retailers post the same thing this earning season. The truth is, consumers still aren’t spending a lot – and when they do spend, they are sticking to essentials.
Consumer spending drives the majority of the US Economy, and failing to spend money will trickle through to the rest of the economy.
And do consumers really have reason to worry? Yes they do! There is still a lot of employment uncertainty – a weak economy means less hiring, then tack on furloughs, and you have a challenging environment for the Average Joe.
But I don’t blame the consumer, I really blame Congress… retail spending is just an indicator.
Congress is truly at fault for the weak economy, and their action on three separate issues will be a key indicator of how the economy will fare in the second half of the year. We already know how Congress promotes financial unaccountability, but most members of Congress are truly unaccountable to how their actions impact the economy. The issues before Congress that we need to pay attention to are Obamacare, taxation, and the debt ceiling.
Obamacare isn’t a problem for the reasons Republicans portray in the media. No, Obamacare is a problem because Republicans keep trying to repeal it or modify it. The truth is, businesses need a stable set of government regulations to do business in. For the most part, businesses don’t care whether Obamacare exists or doesn’t exist. They just need to know what it will be so that they can plan accordingly. Right now, it is nearly impossible for a business to plan for their healthcare costs (and possibly their tax liabilities) because of the uncertainty around this massive program.
As a second thought, this doesn’t even touch on the off-base threats to shut down the government if Obamacare isn’t repealed. Let’s just hope this doesn’t gain any more traction, because that would surely throw the economy into a recession for at least the quarter in which the shutdown takes place.
Taxation is another area that has businesses hurting. Wal-Mart, in their last earnings statement, highlighted that the higher payroll taxes that went into effect this year are hurting the consumer. That’s just the tip of the iceberg when it comes to taxation issues facing the economy. The furlough (as a result of a standoff from taxation and tax cuts) has significantly hurt the economy because a lot of people are suddenly getting a lot less to spend each month. While this will alleviate a bit in the fall, there is already talk of more cuts. That doesn’t bode well for the weak economy.
Finally, we’re coming up on debt ceiling negotiations again. Hopefully Congress learned their lesson from last year, but chances are they didn’t. It will once again be down to the wire, and there is going to be a lot of unnecessary brinkmanship. What Congress doesn’t get is that all of their brinkmanship has negative impacts on the economy, and failure to move quickly on this can further negatively impact the economy.
The Fed Raising Interest Rates
Finally, the idea of the Fed raising interest rates before the structural issues of the US Government are address are scary. The economy is weak on both the unemployment and economic growth front because of the actions of Congress. But too many people are critical of their easy money policies. While sound can be wound down or scaled back, for the most part, the policies need to continue until there is sustained growth in the job market and sustained economic growth – combined with structural reforms that will ensure we can maintain the progress we’ve built on since the Great Recession.
Without structural change, the Fed raising rates will simply be pulling the economy off life support. People may criticize Bernanke and his loose policies, but people tend to forget that Bernanke was a scholar of the Great Depression. His doctoral work was based around how the United States could have responded differently to the Great Depression, and how the legislative actions combined with the actions of the Fed actually made matters worse, not better.
Right now, our current situation really parallels that Great Depression. We had a big shock in 2007. Here we are in 2013, and there are still not a lot of solid foundations. The actions of the Fed are the only actions that can be pointed to that have contributed to some stability. The bailouts – championed by Bernanke – were also successful at the time. But the fact is, without further structural changes by Congress, the economy will nosedive without Fed stimulus.
It’s Not All Doom and Gloom
Remember, these are indicators. One thing occurring or not occurring doesn’t mean anything. However, I believe that if all of these events occur, or at least a majority of them occur, the economy will tumble back into recession.
So, for the macro-economic watchers, what are your thoughts? Are we on the brink of heading back into a recession?