U.S. Recession in late 2015 or 2016?

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As we continue to move into 2015, several economists are now joining with the Amateur Economist that an economic slowdown might be in store for the U.S. in late 2015 and 2016.

Previous posts on this blog, here, here and here, have highlighted why this will occur. Many times in economics, a fact or leading indicator may sound good, but look closer and it may not be so.

Courtesy of The Wall Street Journal
Courtesy of The Wall Street Journal

The rising American Dollar might make Americans feel good and foreign travel less expensive, but is it good for business and the economy?  Generally no. Almost 50% of all earnings of companies on the Standard & Poors 500 derive sales from countries outside the U.S. Put simply, the higher the American Dollar, the more expensive American products and services become for non-Americans – resulting in lower sales and profits for American based companies.

Additionally, a higher U.S. Dollar causes the reverse from imports – they become LESS expensive. Again, this may seem a positive thing for the American consumer, though for the U.S. economy, it is not. More cheap imports mean a wider negative trade deficit (importing more than exporting.) And take note – one of the four components in the calculation of the nations GDP is the trade surplus/deficit.

Other reasons for the anticipated decline of the American economy concerns deflation. Again, deflation may seem like a good thing on the surface – cheaper goods and services right? But as this Amateur Economist has pointed out many times, deflation is the arch-enemy of economic growth and prosperity. Deflation is a race to the bottom – both in wages, prices and living standards. And the world is now shipping their own deflation to the U.S. courtesy of a rising U.S. Dollar.

Lastly, the continued contraction of the U.S. oil industry and all the peripheral businesses, will impact the growth of the U.S. Though not reflected yet, expect to see rising unemployment in former oil-boom areas of Texas, the Midwest and the Dakotas. Along with rising unemployment, there is a marked decrease in capital investment by energy companies going into 2015 which will negatively affect GDP.

Business capital spending rose 6% last year due to gains from a broad base of U.S. industries. The drag from energy this year could cut that growth rate in half in 2015, according to economists at Goldman Sachs. Moreover, equity analysts at the bank estimate capital spending globally by energy companies in the S&P 500 will fall 25%, leading to the first annual decline in overall capital investment by big businesses in many sectors since 2009. Already, energy companies in the S&P 500 have announced about $8.3 billion in spending cuts. (Wall Street Journal, March 22, 2015)

These factors, along with others, are danger signals that the U.S. economy is entering a dangerous period.