10 Reasons We Are Heading for a Recession

Includes: AGG, DIA, QQQ, SPY
by: Clayton Reeves

The debt ceiling debate has reached a tentative conclusion as I type this. The outcome at this hour is an increase in the debt ceiling of $2.4T and a series of budget concessions over ten years of an equal amount; this resolution may solve nothing in the short term, but aims rather to placate the markets and ratings agencies. The ceiling hike itself is one of 70 in our history, but has been treated with all the fervor and circumstance of an economic World War III.

Our country has come to the brink of default, as the politicians like to say, because of more pervasive, systemic, symptoms than will be addressed in this 12th hour congressional procession. Even with such drama and potential for climactic hero shenanigans, it may not be enough to steer the country out of another economic downturn. The following 10 reasons give a foundation for why I believe we may be approaching another recession.

  1. Debt Downgrade – Without some sort of political miracle, the proverbial “kicking of the can” down the road may do nothing to stop ratings agencies from downgrading United States debt eventually. If they do, a recession will most certainly follow. According to a recent article by David Rosenberg, in the last 17 years there have been nine developed countries downgraded from AAA. The following year, he says, the median decrease in GDP is 2.5%. This would put the U.S. into a tight spot given the lethargic growth of the last couple quarters.
  2. No One to Consume – With the United States at least looking for a path towards budgetary responsibility, there is no longer a great sucking sound (in the form of U.S. consumptive demand) to spur the world economy out of its funk. With decreased government spending and withdrawal of stimulus, the U.S. cannot create enough consumption to pull the world out of economic hardship. This is a new situation, and may lead to another dip.
  3. Worldwide Debt Levels – More and more countries have levered up over the last ten years and now that debt is becoming more difficult to carry. This burden most pointedly has impacted Japan, PIIGS countries in Europe, the United States and now … China. China has been pursuing progress without heed for expense. The recent tragedy on the high speed rail has brought light to the potential costs of this strategy. With China now carrying 60-90% of GDP as debt, it could be time for them to slow things down. This will only lead to more tepid global growth.
  4. Deep Rooted Euro Issues – The eurozone, despite a hastily arranged bail out of Greece, still displays foundation cracks that threaten to bring the entire arrangement crashing down. Centuries old cultural and societal strife continue to plague a union that needs unity now more than ever. If one or more of the other troubled nations finds themselves in a sticky situation, will the European Union be able to arrange more bail outs? It seems difficult to imagine that there is much remaining goodwill in Germany and France to do so.
  5. Real Estate Market Sluggishness - The real estate market received a boost last week when pending sales were reported at a 2% increase instead of an expected decline. However, for this to truly mean anything, those pending sales will have to become existing sales. With cancellations increasing, the pending number has not been as reliable a leading indicator of existing sales as in the past. If there are a slew of cancellations this month, expect the existing number to disappoint.
  6. Lack of Jobs – The job market recovery, or lack thereof, will continue to be a political bane for Obama and a hindrance to any continued recovery. With weekly jobless claims giving only dim hope for the unemployed, any sort of negative news may cause that number to spike.
  7. Worldwide Austerity – Austerity continues to be a road that many nations are forced to travel. The burden of debt has prompted this, and the results will prove to be detrimental to overall growth. These are the pains necessary to restore balance and sustainability to the world economy as a whole, but they will not be without their hardships on developed and emerging economies alike.
  8. Sentiment Declines – Indexes of consumer spending unexpectedly hit a lull in May as prices increased and caused households to cut back. Some view this decline as temporary, with decreasing commodity prices to set the stage for the second half of the year. If inflation rises, then the GDP may remain positive, but will be eaten into in real terms.
  9. Manufacturing Falters – Numbers for the Institute for Supply Management fell last month to 54.5 from 55.3. This reading still indicates growth, as does any above 50, but a dip in the next reported number could spell trouble. Additionally, orders for durable goods unexpectedly fell in June. This, coupled with slower than expected increases in inventory could spell trouble for capital spending in the second half of the year. A caveat with durable goods, is that it was largely transportation driven, with other durables showing signs of life.
  10. The White House Doesn’t Expect It – On Sunday, WH economic advisor Gene Sperling dismissed fears that the U.S. economy may be headed for another slump. He said he wasn’t worried about any sort of double dip. Taken in context with the rest of the indicators listed here, this is just the sort of contrarian indicator I find compelling.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.