World Economy

Three More Recession Indicators Flash Red in US

Three More Recession Indicators Flash Red in USThree More Recession Indicators Flash Red in US

The odds of a recession in the US economy are rising as the list of recession indicators flashing red grows.

"On the housing front, we have the annual rate of new housing starts at almost 1.1 million in May 2017. This was down 5.5% from April 2017, and down 2.4% from May 2016. The date shows that housing starts have been dropping since October 2016," news analyst Michael Lombardi wrote for Lombardi Letter.

A drop in housing starts says that demand in the US housing market is deteriorating, the result of which will eventually be a loss of construction jobs. The weakness in the new housing market could be directly related to weak consumer confidence.

For the past six months, US consumer confidence has been declining. This is not good. It suggests that consumer consumption could be on the line. This is worrisome, considering that consumption accounts for about two-thirds of US gross domestic product.

Finally, capacity utilization in the US economy has been on a downtrend since late 2014. This indicator shows how much of their total capacity to produce is being used by American industries. Think of it this way: of a factory's resources that are available to be used, capacity utilization indicates the percentage that is actually being used, he said.

American industries are currently only operating at 76.6% of their available capacity. All of these negative recession indicators are happening at a time when the Federal Reserve is raising interest rates. This will not end well.

As we enter a recession, we could see the following three things:

1. The stock market massively declining, since a recession leads to lower sales and earnings for companies on the key stock indices.

2. The Federal Reserve rethinking its monetary policy; with interest rates falling again. (For the record, I see two more interest rate increases first, because the Fed's actions usually lag the market.)

3. The US dollar coming under fire as the US economy softens. This would have an immediate negative impact on the stock market, as about half of the S&P 500 companies have sales outside the United States.

In other words, this is not a great time to be invested in stocks.

Meanwhile, Illinois entered its third straight fiscal year without a budget as Republican Governor Bruce Rauner and Democratic lawmakers struggle to agree on how to rein in the government’s chronic deficits, pushing it closer toward becoming the first junk-rated US state, Bloomberg reported.

Illinois legislators failed to enact a budget by the end of Friday, the last day of the budget year. While negotiations continued and lawmakers planned to meet over the weekend, the failure marked a continuation of the unprecedented impasse that’s left Illinois without a full-year budget since mid-2015. Without a deal around July 1, S&P Global Ratings has warned that the nation’s fifth-most-populous state will likely get downgraded again, losing its investment-grade status.


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