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BFS Capital Blog

Are We Headed Into Another Recession?

February 15, 2016

Just when you thought it was safe to go back in the market, January happened.

In case you weren’t glued to CNBC to start 2016, stocks had their worst two week start in history as the DOW dropped 1,437 points.

Add onto that, seven states reporting economic decreases in the last quarter of 2015 – North Dakota, Alaska, Wyoming, Wisconsin, Illinois, Louisiana, and Mississippi – and another two with no growth, and the “recession” word is starting to creep back into the conversation.

It’s almost as if Americans are getting dumped out of nowhere. “But things were going so well. I thought we really had something here. Was it something I said?”

Well, kind of … and some of it is just cyclical. To examine why we might be headed back down the road to recession, let’s take a look at some key economic indicators, and see if there’s really anything worth worrying about. We take a closer look to see if we may be headed into another recession and point out the key indicators that business owners should be monitoring.

Production and Earnings Are Down

Ten months during 2015 saw month-over-month declines in industrial production. And even though that’s not the backbone of the U.S. economy that it once was, it’s also the first time a decline like that has happened outside of a recession.

There was also a significant drop in the last quarter of 2015 in total number of hours worked. Which might sound lovely when you’re taking more time away from the office, but the statistic is a key indicator that things are slowing down.

The S&P 500 also saw a 5.3% drop in the last quarter of 2015, marking the third straight quarter that index saw decline. The last time that happened? The first three quarters of 2009. And we all remember what great times those were.

The market volatility has corporate America concerned, which some economists predict may lead to layoffs in order to hedge expenses. That might explain why 2015 saw a 2% year-over-year increase in new unemployment claims, equating to about 340,000 a week.

Problems Overseas

Much as we’d like to believe it, the American economy doesn’t exist in a bubble, and other counties’ problems can also become our problems. The world’s second-largest economy, China, looks to be on the verge of recession as well. Meaning we won’t be able to borrow from them to bail ourselves out as we’ve done before.

The Chinese government doesn’t allow its citizens much opportunity to invest overseas. Meaning all the newfound wealth has stayed in China. Good news temporarily, but the influx of cash has driven up prices of things like real estate and its technology sector where some stocks are valued at 220 times earnings. In comparison, dotcom stocks at the height of the U.S. tech boom were valued at 150. Not sure what the word for this is in Mandarin, but in America, we call this a “bubble.”

China, along with other developing nations, saw much of its economic growth come from investments in infrastructure like roads, transit systems and logistics centers. Now that all of those are built, there isn’t enough industrial demand to sustain that growth, and those countries are now seeing economic contractions as well. Bad news for American companies seeking foreign investment.

But It’s Not All Bad, Right?

Well of course not. Sure, history shows that about every five years the U.S. economy dips into some kind of recession, and we’re on year seven right now. But that’s not an immediate cause for panic.

The University of Michigan’s vaunted consumer sentiment index, which monitors consumer confidence, moved up to 93.3 in January, about .3 higher than economists had predicted.

Earnings are also expected to outpace GDP production this year, meaning that we haven’t reached the peak of the earnings curve for this cycle.

And finally, cheap gas is still driving spending. Believe it or not, total miles driven by U.S. drivers is like an economic canary in a coal mine, and as those miles drop, so does the economy. In 2015, that number was the highest it had been in ten years. And airplanes, uncomfortable as they are, were still 85% full. Though it’s closer to 115% if you ask anyone who’s been on a plane recently.

That’s not to say go out and hire a dozen new employees because gas is cheap. When you run a small business, you’re particularly susceptible to economic downturn, so continue to keep an eye on key indicators to see how your business fares. And if things do go south, there’s no need to throw in the towel. BFS Capital is always there with a quick influx of capital to keep you afloat when the economy slows down.