US Economy Continues to Weaken As Warning Signs Flash Recession Ahead

Tyler Durden's picture

Submitted by Guy Manno via CrushTheMarket.com,

The US economy continues to show weakening conditions as new warning signs are flashing recession ahead. This is despite the best efforts of the FED and the US Government to ensure there is plenty of measures in place to continue to stimulate the economy.

Over the last few weeks we have received several economic announcements on the US economy, with a few positive or better than expected results. However the vast majority of announcements have been poor or woeful as the economic data continues to show further weakness within the economy.

US Q3 GDP - A Convenient Smokescreen

I know what your thinking, hang on a minute on Friday we had a first look at US Q3 GDP and the result was positive and even beat expectations. This is correct GDP came in at 2.9% beating expectations of 2.5% and smashing last quarter's result of 1.4%.

However I find the result convenient and timely considering there is an election in less than 2 weeks time. The second and third estimate for GDP could see considerable revisions lower after the election has ended.

The other interesting points about the GDP result was that a 1/3 of the GDP growth came from a one off exporting boost of Soybeans.  This is not a normal occurrence for the US however due to shortages in other countries due to crop damage, there was a surge in demand for soybeans  exports. The one off export surge contributed 0.61% of the GDP growth.

Another big factor for the surge in GDP was a large inventory buildup in the quarter contributing 1.17% of the GDP growth. The most likely reason for the surge in inventories is in anticipation of a big pickup in spending for Christmas. However as I'm about to show you below the US consumer is struggling to meet their living costs, as the consumer is no longer confident and struggling with price rises for everyday items.

In addition the majority of the job gains over the last 12 months have been in part time jobs and low paying services jobs like in restaurants and bars which typically bring in lower incomes. Therefore companies are going to find it difficult to clear all the inventory ordered in the Q3 for the coming quarter. This will lead itself to lower GDP result the following quarter as companies struggle to clear excess inventory over the holiday period.

Lastly GDP is measured after deducting inflation for the quarter. In the most recent quarter released last Friday the GDP price index / inflation was measured to be 1.4% compared to 2.3% last quarter. This means the Government is indicating that inflation has slowed considerably from the previous quarter. For everyday citizens in the US they know this doesn't make much sense as rent, food, fuel, electricity, healthcare and education continues to jump higher making it harder for average American's to pay for everyday items. If the GDP price index remained the same as the previous quarter at 2.3% the GDP would of been further reduced to reflect a more accurate measure of US economy.

Leading Indicator - Investment Swings To Contraction

Over the last 65 years you can see the steady decline in terms of investment as the US slowly began investing less into the economy with each economic cycle. More importantly each down turn in investment relative to GDP was a perfect leading indicator to a US recession, as corporate America cut back spending with each contraction within the economy.

The red marker's together with the red vertical lines on the chart represent  the start and ending of economic contractions (recessions) in US history since 1950.

Currently investment has again peaked within the new cycle and is now heading down indicating the US economy is about to head into a recession if the economy is not already in one unofficially. 

Net domestic investment as a share of GDP
Click chart for source: bloomberg.com
This short video below highlights the chances of a recession after an election is typically at 52%,  regardless of who wins the election. Over the alternative 2 year period of no election the chances of a recession drop to around 25%.
 
 

FED Chart Predicts Recession 71% Of The Time

This chart is one the FED monitors to determines the strength of the labor market. The vertical pink lines are previous recorded official recessions within the US since 1977. The circles are to illustrate each time the labor market conditions fall's below 0%. Since 1977 five out of the seven times or 71% of cases the index has fallen below zero the economy has fallen into a recession. Currently this Labor market conditions index has fallen below zero.
US FED labour market conditions YoY
Click chart for source: zerohedge.com

Consecutive Quarters Of Declining Earnings

Here is another chart showing US corporate profits going back to around 1950. The vertical red lines represents each time the US has had a recession since the 50's.

What you will notice is that each recession except one back in the late 80's resulted in corporate profits declining for consecutive quarters. Or the fact corporate profits fell consecutively leading to a recession most of the time.

Presently the US has had 5 consecutive quarters of corporate profits falling. The current quarter profit season is still in progress with high odds that we will make 6 consecutive quarters of declining profits. If this occurs this will the most quarters of profits declining without a recession officially occurring.

US corporate profits chart
Click chart for source: bloomberg.com
In this interesting video Wilbur Ross explains in a concise way the current state of the US economy. He describes the economy as weak and that market valuations are high. He also believes there  is no avenues for revenue growth for corporate America due to weakness currently in the economy, which most likely will lead to a recession. in the next 18 months.
 

No Revenue Growth = Business Cut Spending.

Last Thursday the US released durable goods spending which represents capital expenditure by companies. The chart below is the capital goods orders that excludes defense and Aircraft spending. This chart is important as it's a proxy for business spending in general and gives you an indication of the strength of corporate America.

If you look over to the right side of the chart below you can see that capital goods spending has basically been declining nearly every quarter since 2014. If the economy was strong companies would be investing in more capital goods to grow production and revenue. This would be from an increase in demand for the goods and services they provide. However the opposite is present as demand continues to fall leading to companies cutting back expenditure to counter weak demand.

US capital goods new orders excl Defense
Click chart for source: zerohedge.com
The chart below coincides with the lack of capital spending for companies in the US. Because more companies are facing tougher conditions to grow their business falling to levels seen in 2014, companies have had to rely on cost cutting and stock buybacks to lift earnings per share (EPS) rather than on actual revenues increases.

With rates so low in the US at 0.25% it's not a good indication that business conditions are declining.

US business conditions
Click chart for source: zerohedge.com

Poor Christmas Sales Foretasted

Consumer confidence continues to fall with the latest results on last Friday showing confidence dropping again to levels last seen in 2014.

Like I mentioned above regarding the huge inventory build of companies for the lead up to Christmas. Companies will realize in the coming months that this was not a good idea, as the consumer does not feel confident with rising prices and lower spending power from their paychecks, leading to lower spending than the previous holiday season.

Consumer Confidence
Click chart for source: zerohedge.com

Bad Debts Spiking In 0% Environment.

This particular chart shows the delinquency rate on company loans made by banks since the late 80's. The last 2 recessions the US had in 2001 and 2008, both show delinquency rates spiking before each recession occurred.

In the current business cycle delinquency rates / bad debts have spiked from below 1% to the current level of 1.6%. Keep in mind interest rates are currently at 0.25% having been at zero for about 6 years. Therefore rates are extremely low compared to previous business cycles yet companies are having trouble paying their loans.

The other troubling fact for the banks is that debt level for companies are much higher than the last recession. This is due to record low rates enticing companies to borrow to  start or increase stock buybacks and increase dividends. So any fallout from an accelerated delinquencies within corporate lending, will have a much  deeper negative impact to bank's solvency than the 08 recession.

Delinquency rates for commercial loans
Click chart for source: bloomberg.com

Leading Indicator Small Cap Index  - Breaking Down

Small companies are traditionally a leading indicator of strength and weakness within an economy. When an economy is set to expand out of contraction you will notice that smaller companies tend to lead higher in price before large cap and blue chip companies do.

On Friday the Russell 2000 index which is the US small cap index broke a key support level on both a weekly and daily chart.  Even though the S&P 500 is still within record highs, the small cap index has broke away from the larger index as it has ended its long term uptrend as well key support levels.

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Takeaction2's picture
Takeaction2 (not verified) Nov 2, 2016 10:55 AM

Way too much news...I am starting to see a weakening in the Portland Oregon Real Estate market as we speak.  Sales have screached to a halt from what my realtor company owners are saying.  I think the election has a lot of people hesitant.  TRUMP 2016

hedgeless_horseman's picture

 

Almost every drive into town I am seeing multiple, new, Aston Martins, Maseratis, Porsches, Bentleys. Lamborghinis, Ferraris, and even McLarens since they built the new new dealership.  

Ghost of PartysOver's picture

Lets beat the mentally challenged Dems to the chant.  "Trumps Fault".  Nothing could be further from the truth but it will be heard over and over again. 

roxyNL's picture

 

"1/3 of the GDP growth came from a one off exporting boost of Soybeans"

 

US is now a Soybean republic !

 

floomby's picture

Dude soybeans are a big deal. Our creative food engineers have figured out how use them to make all sorts of things. Plus they can be mechanically harvested and are pretty nutricious. They can be grown in a wide range of environments. Additionally they are nitrogen fixers so you can rotate them into a growing cycle with other crops to cut down on fertilizer costs. I think soybeans are also decently pest resistant. They have more protein than most (maybe all) other similarly priced crops which makes them ideal for making vegetarian products, plus soybean oil makes a good cooking oil (due to a realitivly high flash point) and can also be used as a base for things like furniture polish.

A quite important crop, much more versitile than corn.

beauticelli's picture
beauticelli (not verified) floomby Nov 2, 2016 7:41 PM

America's WOES won't be fixed because politicians benefit from them.
http://bit.ly/2eeHcZb

Takeaction2's picture
Takeaction2 (not verified) hedgeless_horseman Nov 2, 2016 11:10 AM

City???

hedgeless_horseman's picture

 

Where the stars at night are big and bright.

I also saw a Maybach 600 and a Rolls-Royce driving around last month.

Where the locals are really dumping money is the custom 4x4 monster trucks.  I see one at almost every stop light.  

FinanceNewb's picture

im in the same state and havent seen any new high end dealerships built or an uptick in high end cars like that on the road.

 

Our business is down and people think an uptick is coming next year but now they are starting to say in 2018... trying to spread the word but its still tin foil hat stuff to them when i talk

Kprime's picture

it's certain he lives in D.C. Lamborghinis is the new D.C. employee car for 2016.

Kidbuck's picture

Three negative reports from govt agencies just this week. They are no longer propping up the Obama story and thus have turned on Cankles. All government workers hail Trump, your new master.

The Ram's picture

Why is the recession always in the future?  

King Tut's picture
King Tut (not verified) Nov 2, 2016 10:57 AM

Oil back to $30 by Jan 1

RadioFlyer's picture
RadioFlyer (not verified) Nov 2, 2016 11:00 AM
King Tut's picture
King Tut (not verified) RadioFlyer Nov 2, 2016 11:04 AM

There's no way these Fed bastards will allow a nice bout of deflation to aid the middle and working class

GUS100CORRINA's picture

RECESSION IS COMING??????

IT IS ALREADY HERE AND HAS BEEN FOR THE LAST COUPLE OF YEARS IN THIS MUNIPULATED MESS!!!!

JOHN WILLAMS FROM SHADOWSTATS.COM HAS BEEN TALKING ABOUT IT FOR TWO YEARS!!

FreeShitter's picture

Its been here since the dot com fiasco....Depression is what's coming and a nasty one.

ebworthen's picture

The depression never ended for real people, this article is about recession for the bank/corporation/insurer cabal - who will be bailed out again right after the casino is crashed to rake more of Mom and Pop's chips off the table.

Grandad Grumps's picture

Our business had a great October.

The globalists want to pin their fraud and mismanagement on populism ... but really, everyone knows that corruption at the top is to blame and that putting the future of this world in the hands of the same people is a huge mistake.

rp2016's picture

we have been in a recession for a long time. The growth, whatever it is, is only due to bad quality GDP.

http://just-a-thought-from-thinair.blogspot.com/2016/03/honest-money-man...

ToSoft4Truth's picture

Recessions are cyclical or thought another way, QE is cyclical. 

buzzsaw99's picture

1) lost domestic investment is replaced by usa gubbermint deficit spending and (student, auto, mortgage) loan guarantees.

2) earnings are irrelevant

3) never bet against the american consumer at xmas

4) bad debts = the fed will buy them.

 

what else ya got?

Lady Jessica's picture

5) infinite forbearance for the debts the FED won't buy?

Herdee's picture

The Fed will hike because they use the wrong outdated models. Their credibility is on the line. If Trump gets in Janet is burnt toast, guaranteed gone.

Stan Smith's picture

    I think Janet is burnt toast regardless of who gets in.   It'll just be in slow motion if its Hill the Shill.    Regardless the Fed gets the criticism it deserves.

Stan Smith's picture

How is this news to anyone? Even the banksters. It isnt.

billhicks's picture

To the banksters of course not, to the presstitutes maybe, to the sheeples of course
...

Infield_Fly's picture
Infield_Fly (not verified) Nov 2, 2016 11:18 AM

LMFAO!!!!

Recession coming - but the last 7 years have been a roaring boom.

 

Thanks for trying Guy.  Are you going to BTFD???

 

I guess we still have economic macro believers out there.

the grateful unemployed's picture

its the forever recession its like jumping to your death from a 1st story window

 

Last of the Middle Class's picture

Or, the depression is still with us even though QE has bailed out a shit load of TBTF banker friends. You chose the headline.

ajkreider's picture

The "recession light" has been flashing red on ZH for about 3 years now - and still no recession.  I think it's time to find different indicators.

billhicks's picture

The bad news is nothing lasts forever
The good news is nothing lasts forever
Think you should have posted this some time ago
;-)

Doom and Dust's picture

These growth numbers are meaningless to most Americans without the net immigration stats for the same period.

the grateful unemployed's picture

part of this is the fear trade. business is worried about new admin in DC, Trump being a wild card, so they have held back spending. its a head fake, of course it all depends on what happens in january. the last two GOP presidencies were economic disasters. Obama added to the deficit with little to show for it. now the talk is fiscal spending, and that means Congress, it will be pork barrel for sure. interest rates are self levitating the fed has to raise rates or create a disaster of its own making. the recession can be delayed by fiscal profligacy, but not for long, as interest rates go higher and maybe sharply higher. by march maybe 4% GDP 2% rates, 5% inflation, depending on who is in office. if washington funnels money to the states they will be inclined to keep it in reserve against pension fund losses, so unless its a direct DC program it may not get off the ground.

Absalon's picture

"This is despite the best efforts of the FED and the US Government to ensure there is plenty of measures in place to continue to stimulate the economy."

 

What the heck is the author talking about?  The Republicans have been trying for years to throw the economy in the toilet and the Fed has been doing its best to thwart them but now the FED is out of working policy levers.

foodstampbarry's picture

I don't know about you guy's, but I'm one broke dik. Mr. Yellin raise those rates! 

Canoe in the Desert's picture

Regardless of the statistics...there are those of us that believe the country never emerged from the last recession. Just statistical gov't BS.

  • Jobs? Wage stagnation for many and menial part time work for others. Taxpayer support for the rest.
  • Inflation? Anything that matters is backed out of the equation.
  • Healthcare? The "choice" is between eating in the short run or paying increasingly large premiums and deductibles for Obamacare's worthless policys.
  • Security? Just an illusion.

 

Time to drain the swamp in Washington, DC my friends.

 

pitz's picture

Yet those inflation numbers seemed awfully strong recently.  The Fed is in a real tight box here.  They're going to have to destroy bubbles to get consumption down enough to keep inflation under control.  Yet bubble destruction promises to be quite painful, particularly to those in the tech sector with their no-earnings shares.

Lady Jessica's picture

They're confident they can control inflation by manipulating the oil price.

govtsucks's picture

It's hard to take this guy seriously because his spelling and grammar are on a third grade level.

GoldHermit's picture

Great analysis – I can't believe things have held up this long. Statistics coupled with demographics lead me to believe we are in for a very average period at best and potentially a sustained downturn. The governments will keep printing money until confidence is lost and that is simply building a bigger bonfire before you light it.