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Small Business Management Article

IS THERE A UNITED STATES RECESSION IN THE FUTURE?

By

Raymond D. Matkowsky

Will there be a recession in the future? Will it involve most of the world? Of course, yes. A recession usually comes every four to six years. The United States is presently in its ninth year of economic growth. So, we are way overdue. A recession can come at any time. The U.S. economy is the largest in the world. If it goes into recession, it will take the rest of the world with it.

Many of the economic “experts” postulate two things. 1) The U.S. economy will continue growing at a 3% or more clip for the next two years. 2) The U.S. will not enter a recession until 2020.

I have been studying the United States economy for going on 12 years. I do not see anything that indicates the economy will surely expand at a 3+% clip. On the contrary, everything I see points to the economy maintaining the 1.8 to 2.5% rate of growth it has experienced over the past sixteen quarters. In the first quarter of 2018, the final estimate of GDP made by the U.S. Bureau of Economic Analysis was 2.0%. The “experts” say that the first quarter of every year is low. Therefore, we should not read anything into this number. To this I would point out that the first quarter of 2015 real GDP was in excess of 3% while the rest of the quarters were lower. The final yearly figure was 2.9%. For every economic indicator that goes up lately, one goes down.

Tax Cuts

The present United States administration believes that the income tax cuts on both individuals and corporations will spur the economy. It worked for Kennedy. It worked for Reagan. The conditions in 2018 are not the same as they were for Kennedy or Reagan. The top tax rate for Kennedy was 91%. It was 70% for Reagan (cut in two steps). These tax cuts were bigger than what most people pay in taxes today. An individual does not see a big difference in his weekly paycheck. While the “experts” paint a picture of a vibrant economy, a study conducted by Oxford Economics found that the bottom 40% of wage earners had to draw on their savings just to maintain their lifestyles. Another 40% of Americans have a negative net worth and no financial backup. Millions of families live paycheck to paycheck. I would expect the majority of Americans to keep their pocketbooks closed. Remember consumer spending accounts for 70% of economic growth.

Corporations were thought to spend their share of the tax cuts on jobs. This has proven not to be the case. The vast majority of companies returned the money to their shareholders through buybacks or increased dividends. They are looking to shed jobs not increase them.

The tax cuts will not spur the economy. It will make it worse. The tax cuts will increase the U.S. debt by US$1.5 trillion over the next ten years without increasing growth. Deficits do matter. They squeeze out financing for innovation.

When Reagan found this out, he quietly began to raise taxes to offset deficits. The State of Kansas (U.S.) recently passed tax cuts similar to the federal tax cut. The legislature was forced to reverse many of these cuts because of declining revenues and increasing debt.

Uncontrolled debt

The American national debt has risen to US$21.16 trillion as of this writing. The federal government pays interest on this debt. This is money that crowds out innovation and will eventually out-strip the federal budget.

What is worse is that the federal government lies about the deficit when speaking to the public. For example, Larry Kudlow, the Director of the National Economic Council, said on Fox Business channel that the deficit was “coming down rapidly” when the deficit actually rose to US$804 Billion so far in FY 2018 from US$666 Billion in FY2017. A government that will not admit the true state of the deficit has no hope of correcting it.

Trade Wars

The effects of the tax cuts on the debt of the United States coupled with the fact that a substantial portion of the population feel that they are no better off than they were a few years ago is enough to sink the economy. The U.S. now appears to be entering a world of needless economic pain. When you add the possibility of trade wars with multiple countries to the mix, you most certainly raise the probability of a recession dramatically. Tariffs on products imported into the U.S. are taxes paid by American businesses and consumers. No one wins in a trade war. There are only losers.

It is understood that U.S. trading partners have smaller, more export-dependent economies and they stand to lose more, individually. The dynamic does not hold true if trading partners join forces, such as the EU, México, Canada, and China. However, losing less is not the same as winning.

The chances of cooler heads prevailing is a possibility. Some in industry are hopeful that the trade wars will be resolved. However, trade wars usually involve national pride and prestige. There will be very few cooler heads.

American consumers are starting to get worried. While they may not understand all of the details of a trade war, they understand that the result will be higher prices. Some may even lose their jobs. All of the uncertainty will no doubt cause many of them to close their wallets and cut back on discretionary spending. This will slow the economy to a crawl.

Various trade wars are just beginning, but we have already begun to see the effects. México and Canada have all but stopped negotiations on any new NAFTA agreements, México has imposed a US$3 billion tariff on pork, apples and cheese. The EU has raised tariffs US$3.4 billion on bourbon, blue jeans and motorcycles. China had dramatically slowed soybean purchases, steel prices are 38% higher than they were at the end of 2017, Hartley-Davidson moved some production overseas to avoid steel and aluminum tariffs’ costs. Mid-Continent Nail Corporation laid off 12% of its workforce because of the reduced sales caused by the steel tariffs. The consequences of the tariffs are just beginning.

If people still have doubts about the serious consequences of tariffs, let me remind you that the Smoot-Hawley tariffs were what really set off the depression of the 1930s. At that time, it was also assumed that trading partners wouldn’t dare retaliate against the United States.

Unemployment

There is nothing wrong with low unemployment, but it could also lead to a recession. During periods of high employment, workers grow scarce and wages rise. This means that companies must makeup this loss with higher prices (inflation). This factor by itself may not be the direct cause of a recession, but combined with other factors it can certainly be a contributing cause.

The last three recession recoveries were called “jobless recoveries” because unlike previous downturns unemployment did not immediately bounce back to pre-recession levels. This is because employers were looking to cut their costs by replacing workers with automation and will do so again. This will only accelerate the coming of the next recession and increase its severity.

Conclusions

Many factors that can contribute to a recession are present. Individually, each factor may not imply a slowdown is imminent. However, when they are grouped together, they become a source of concern.

2018 only has six more months (two reporting quarters) to go. We expect GDP to range between 1.8 to 2.5% for the remainder of the year. In other words we expect the economy to muddle through just as it has for previous quarters. I do not see the economy slowing down further. I also, do not see it accelerating. If it was not for the possible trade wars heating up, we would have expected the same for 2019.

Trade wars cast a completely different shadow on the economy. If things get worse we will have a recession in 2019. The more harsh these trade wars become, the earlier the recession will arrive and the more severe it will be.

At Data Stats we follow the economy and publish a chart showing year to year data for the previous sixteen quarters. We use year to year data because we believe it will reflect year end data more accurately. This chart should give you earlier warnings of economic trends than government publications. Government pronouncements tend to come about six months after the start of a recession. This comes too late to adequately prepare. Use our data to visualize the trend and get a jump on your competition and plan your future. Of course, we will continue to point out both negative and positive trends as we see them.


If you have any further suggestions, do not keep it to yourself. Help your fellow readers!

If you have any questions, comments or suggestions drop me a line at rdm@datastats.com.




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