If This is a Recovery, Wait Until the Next Recession
Despite seven years of economic growth, a recession is on the horizon.
Since the Global Financial Crisis of 2007 – 2008, many investors and consumers have been wary of the condition of financial markets. Between mid-2009 and present, many of these concerns faded, and people who continued to be skeptical were labeled as pessimists or speculators. Unfortunately, these so-called skeptics may have been correct; the economy is unstable.
After the Global Financial Crisis ended, many pundits and finance experts suggested that the economy was experiencing a recovery. Specifically, they stated that the economy was undergoing an expanding business cycle. In normal conditions, a business cycle expansion is associated with employment rates and GDP rising beyond pre-recession levels. As you may have noticed if you have been following economic outlook data, this does not describe the current economy of the United States.
While the employment rate has been increasing rather quickly, production is expanding at a slow pace. Since the last quarter of 2015, the GDP of the United States grew by a mere .5 percent. According to basic macroeconomic trends, a healthy growing economy experiences expansion in both employment and productivity. The economic data of 2016 suggests that strange activities are going on in financial markets. Combined with unstable global markets, these anomalies could cause a major recession that rivals the Global Financial Crisis of 2008.
Productivity Lags While Labor Markets Boom
A GDP growth rate of .5 percent often indicates uncertainty in financial markets. It can also show that some business models are unsustainable. According to the New York Times, this lack of productivity suggests that firms are simply maintaining output without investing in technology. It may also suggest that there is a serious lack of innovation in non-tech sectors of the United States’ economy.
The increasing wages of the past years indicate positive short-run economic outlooks, but there is greater uncertainty for long-run growth. Unless companies begin to invest in new technologies and innovation, they will stagnate. Over time, profit margins will shrink, and workers will be forced out of the market. Unfortunately, this problem cannot be solved by simply advising companies to invest in productive activities. Global trends, potential stock bubbles, and unconventional monetary policies are deterring companies from engaging in behaviors that will yield long-run benefits.
Spending Habits Reveal Deep Financial Problems
According to some recent statistics reported by the Huffington Post, the aggregate spending habits of consumers do no match the optimistic economic outlook of economists within the Fed and US Labor Bureau. Unsold products are accumulating in companies’ warehouses due to decreased sales, so it is clear that many CEOs and consumers are uncertain about the future.
The inventories-to-sales ratio, a figure that shows the proportion of unsold products, indicates that the United States is creeping towards another recession. In 2008, the inventories-to-sales ratio climbed beyond 1.45. Any figure above 1.25 indicates that industries are in decline, so 1.45 is a sign of financial turmoil. From 2009 until 2013, this ratio returned to pre-crisis levels. This recovery was short-lived; from 2013 until 2015, the ratio expanded to 1.35. In 2016, the inventories-to-sales ratio is 1.45. Unless the investment situation drastically improves, you can expect a shrinking economy and decelerating employment growth.
This poor economic outlook will also increase uncertainty in financial markets. When this occurs, people choose to save instead of invest. Due to the current monetary policies of the United States, investors may just settle for alternative assets in commodities and bonds markets. This decreased demand for stocks can cause prices to plummet.
The Global Outlook Suggests an International Economic Slowdown
Expansionary monetary policies have failed in the United States, Japan, and other areas of the developed world. With weak investments, low productivity, and rising wages, a recession is growing. Despite data suggesting that a recession will occur, the signs of a financial crisis are not yet noticeable at the domestic level; housing markets continue to grow while entertainment industries boom.
A similarly optimistic environment exists in Europe, but the looming threat of Brexit and threats from the Middle East shake financial markets within the EU. Conference Board, an organization that specializes in analyzing the economy, suggests that the economy of Europe will grow if political matters can be deescalated.
China is a wildcard in the global economy, but it is expected to maintain an annual growth rate of 3.8 percent. In spite of this stable growth, George Soros suggests that a global financial crisis could stem from the rapid expansion of credit within China. This crisis would be quite similar to the United States’ Subprime Mortgage Crisis.
Although many people claim that the US economy is growing, economic data suggests that recovery will soon come to a screeching halt. For more information about the next recession and economic outlooks, go to Personal Money Store.