Will a U.S. Economic Collapse Happen in 2017?
Could the U.S. experience an economic collapse in 2017? The idea sounds pretty implausible; after all, U.S. stocks are at record levels, unemployment has fallen to 4.4%, and the Fed recently raised its key lending rate for the second time in 2017. Surely these are signs that the U.S. economy is going strong?
Wrong.
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The economic forecast for 2017 is more than bleak, and there is more than enough economic data out there to show there could be a U.S. economic collapse in 2017. Despite trillions of dollars in quantitative easing, the U.S. economy remains fragile, and not even the euphoria, hype, and optimism around President Donald J. Trump will be able to resuscitate what President Obama left him.
#1. U.S. Unemployment is Not 4.4%
There has been a lot of hype about how the unemployment rate has improved over the last number of years, from around 10% in early 2010 to 4.4% in April 2017. And frankly, reducing the unemployment rate to just 4.4% is pretty incredible. Unfortunately, it isn’t really true. Or rather, it is if you don’t look at all the data provided by the Bureau of Labor Statistics (BLS). (Source: “Employment Situation Summary,” Bureau of Labor Statistics, July 7, 2017.)
Consider the June jobs report. According to the BLS, the unemployment rate stayed level at 4.4% and 222,000 new jobs were created. On the surface, this sounds amazing. But it isn’t.
The unemployment rate does not include discouraged workers who cannot find jobs and have stopped looking. And those jobs that were created are not what they appear, either.
First, let’s look at the actual unemployment rate. The improved jobs data comes as a result of new jobs (more on that later) and partly due to those retiring or leaving the workforce. The unemployment rate is down so much because the number of Americans not in the workforce soared by 446,000 in November 2016 to a record 95.1 million. In June 2017, it sat at 93.2 million. The participation rate in June was at 63.2%, a little shy of the October 2015 all-time low of 62.4%. Add it up and the overall underemployment rate is 8.6%.
Who are the unemployed in America? Among the major worker groups, the unemployment rates for adult men (4.0%), adult women (4.0%), teenagers (13.3%), Whites (3.8%), Blacks (7.1%), Asians (3.6%), and Hispanics (4.8%) showed little or no change in June.
The number of long-term unemployed (those jobless for 27 weeks or more) was unchanged at 1.7 million in June and accounted for 24.3% of the unemployed.
The number of persons employed part-time for economic reasons (sometimes referred to as involuntary part-time workers), at 5.3 million, changed little in June.
“Unchanged,” “little changed:” these aren’t the kind of words you want to hear to describe an economy that is recovering. If anything, it goes to show that jobs continue to be out of reach for a huge number of Americans.
There’s more. In June, 1.6 million Americans were not counted as unemployed even though they were out of work because they had not searched for work in the four weeks preceding the survey.
So yes, the U.S economy added a solid number of jobs. But the broader picture continues to show an equally large number of Americans out of work.
Moreover, despite the job increases, wages continue to stagnate. Hourly earnings were up 2.5%, continuing a streak of relatively weak wage growth. A seeming contradiction for an economy that is nine years into its recovery and at a time when employers say they’re having trouble finding qualified employees.
It’s hard to tout a strong economy and jobs growth when wages growth is essentially flat and the demand for low-paying, part-time jobs remains strong.
As a side note, it’s difficult to champion the U.S. economy and strong growth when you look at the number of Americans enrolled in the Supplemental Nutrition Assistance Program (SNAP) or food stamps. SNAP recipients totalled 33.5 million in 2009, the year the recession ended; in 2016, that number stood at 45.3 million. An eye-watering 35% more Americans rely on food stamps nine years into the recovery than they did immediately before the recession.
#2. U.S. Inflation Is Stretching American Households
Another reason to fear a U.S. economic collapse is inflation. In June, the consumer price index was expected to rise 0.2%; instead, it inched up 0.1%. This is the fourth consecutive month that surprised on the lowside. (Source: “Consumer Price Index,” Bureau of Labor Statistics, July 14, 2017.)
For the 12 months through June 2017, the CPI increased 1.6%, the smallest gain since October 2016. The year-on-year CPI has been softening since February, when it hit 2.7%.
Initially, the Fed dismissed the inflation misses as temporary, but this trend is getting too persistent to ignore. If inflation doesn’t return, it will be tough for the Fed to justify another rate hike later this year.
Now normally, low inflation wouldn’t be a tough pill to swallow for the average American. Wages are flat, household debt is high, and savings are depleted. However, the 1.6% inflation rate doesn’t really factor in what the average American pays for things. It isn’t the real inflation rate. To get a feel for what Americans are really paying, it’s a good idea to consider the Chapwood Index.
The Chapwood Index is an alternative non-government measure that looks at the unadjusted costs and price fluctuations of the top 500 items we buy (insurance, gas, coffee, dry cleaning, movie tickets, etc.) in the 50 largest cities in the U.S. Thanks to the Chapwood Index, you can see what people around the U.S. pay for the same products and track the change in living costs. (Source: “Welcome To Chapwood Index,” Chapwood Index, last accessed July 20, 2017.)
For example, in New York, Los Angeles, Chicago, Philadelphia, San Diego, San Jose, San Francisco, Seattle, Boston, and Detroit, the five-year average for inflation is over 10%.
Even if you lived in Colorado Springs or Wichita, the cities with the lowest inflation rate, where the five-year average for inflation is around 7.5%, your cost of living is still significantly higher than the official rates.
No matter where you live in America, inflation is seriously outpacing what you make–and, chances are, putting more and more Americans in debt.
#3. More and More Americans Are in Debt and Out of Money
Seven-plus years into the so-called U.S. economic recovery, prices are up, Americans wages are flat, we’re more in debt, and we have little set aside for an emergency. For an economy that gets more than 70% of its GDP from consumer spending, this is not a recipe for economic success.
Case in point: over the last decade, U.S. household debt has soared 11%, with the average household owing $132,529. (Source: “Household Debt Nears Pre-Recession Levels,” NASDAQ.com, January 4, 2017.)
In the first quarter of 2017, U.S. household debt reached a dubious milestone, when it surpassed 2008s pre-Financial Crisis, recessionary highs.
Total debt held by U.S. households reached a record $12.73 trillion in early 2017, topping the previous $12.68-trillion record reached in the third quarter of 2008–the height of the Financial Crisis. (Source: “Household Debt Surpasses its Peak Reached During the Recession in 2008,” Federal Reserve Bank of New York, July 20, 2017.)
It’s getting harder and harder to pay that debt off too, even according to official data. Over the last 13 years, the cost of living has increased 30%, but household income is up 28%. The most expensive debt, credit cards, costs the typical household $1,292 annually in interest charges. With interest rates on the rise, that debt burden is going to get even worse.
The debt burden has put a strain on American households. Twenty-four percent have no emergency fund, 49% of Americans are living paycheck to paycheck, and 46% would have to borrow money if they had an emergency expense of $500.
#4. U.S. Economy Are Not Prepared for Rate Hikes
More and more Americans are relying on part-time jobs, which pay poorly, and getting themselves further in debt. And the Federal Reserve is adding some fuel to the fire in the form of rate hikes.
After years of artificially low interest rates, the Federal Reserve is starting to raise rates. While it’s high time the Fed raised rates, it waited too long, and the repercussions will create another U.S. economic crisis.
Low rates were designed, in principle, to help kick-start the economy. Banks offer cheap money, Americans borrow and spend, and voila, the U.S. economy is on fire once again! The low interest rates were great news for those with a mortgage, loan, or credit card, but in a low-growth environment, that interest rate hike could cripple the U.S. economy.
In December 2015, the Fed raised its key lending rate for the first time in a decade. It was a small hike, but it showed consumers how even a small increase affects mortgages, car loans, savings rates, and other forms of interest-sensitive credit.
In December 2016, the Fed raised rates again, by a quarter of a percentage point, to a range of between 0.5% and 0.75%. Federal Chair Janet Yellen said the economy has proven to be remarkably resilient and that the hike is a vote of confidence in the economy. (Source: “FOMC Minutes,” Board of Governors of the Federal Reserve System, December 14, 2016.)
The Fed raised rates again in March and June. Questions remain as to whether or not the Fed will raise rates for a third time this year. It’s not looking likely. The U.S. economy simply isn’t strong enough to withstand and support another rate hike. The U.S. economy continues to face a lot of headwinds, including weak GDP, weak global economic conditions, high household debt, and a lack of well-paying jobs.
The U.S. economic outlook is somewhat muted as well. In a best-case scenario, the Fed believes the U.S. economy will advance 2.2% in 2017. Assuming the U.S. economy grows as anticipated, the Fed could raise rates two more times in 2017, ending the year with a rate of 1.4%.
Again, that’s assuming President Trump’s economic action plans will send the U.S. economy into overdrive. No matter how admirable, Trump’s plan to cut taxes and increase spending, when the national debt is on the precipice of $20.0 trillion, will be hard to achieve.
Weak economic growth, coupled with rising interest rates, could cobble the U.S. economy and send it back into a recession.
#5. U.S. Stocks Are Significantly Overvalued
U.S. benchmarks are trading at record levels and Wall Street couldn’t be happier. After a terrible start to 2016, equities rebounded with the S&P 500, finishing the year up nearly 10%. Meanwhile, the Dow Jones Industrial Average soared 13.5% in 2016.
The markets have remained bullish in 2017. Over the first six months of 2017, the S&P 500 advanced nearly eight percent, the Dow increased 7.5%, the NASDAQ has increased 13%, and the Russell 2000 is up almost five percent.
The long-in-the-tooth bull market is now nine years old and analysts remain adamant that the bull market, the second-oldest in history, could go on and on for years.
Sadly, the bull market isn’t based on once-tried-and-true fundamentals like earnings and revenue growth; the current bull market was born on frustration. The Federal Reserve took the “income” out of “fixed-income investments” when it introduced its first round of quantitative easing and gutted interest rates.
Four rounds of quantitative easing and artificially low interest rates may have helped those with money make even more money, but it decimated the retirement plans of those who relied on fixed-income investments like certificates of deposit, bonds, and Treasuries to provide them with steady income and help them through retirement.
But with returns hovering near zero, the only place left for investors to park their retirement money was in the stock market. Over the last nine years, investors have sent stocks higher and higher, despite weak earnings and revenue growth. On the surface, that’s good news for those with their money in stocks. But it’s also pushed valuations into nosebleed territory. And should the U.S. experience an economic crisis in 2017, you can expect stocks to hit a brick wall and crash.
How far will U.S. equities fall?
According to the Case-Shiller CAPE ratio, the S&P 500 is overvalued by 87.5%. The ratio is based on average inflation-adjusted earnings from the previous 10 years. The 100-year median is around 16. The ratio is currently at 30.28, meaning that for every $1.00 of earnings a company makes, investors are willing to fork out $30.28. The ratio has only been higher once, during the dotcom bubble in 2000. It was only at 30.00 in 1929. Correlation is not causation, but one thing is certain: when stocks get this overvalued, it never ends well. (Source: “Online Data Robert Shiller,” Yale University, last accessed July 20, 2017.)
Another economic indicator also suggests U.S. stocks are significantly overvalued. The market-cap-to-GDP ratio, which compares the total price of all publicly traded companies to GDP, is also called the “Warren Buffett Indicator,” since the “Oracle of Omaha” calls it the single best measure of valuations.
A reading of 100% suggests U.S. stocks are fairly valued. The higher the ratio is over 100%, the more overvalued the stock market. The market-cap-to-GDP ratio is currently at 128.9%.
The Warren Buffett Indicator has only been higher twice since 1950. In 1999, at the height of the dotcom bubble, the ratio was at 153.6%. In late 2015, it was at 129.7%. It was only at 108% before the 2008 financial crisis.
Over the long run, stock returns are determined by interest rates, corporate profitability, and valuations. Interest rates have an inverse relationship to stocks; if the return on risk-free government securities is higher, there is less of a desire to invest in riskier assets like stocks. If interest rates go up, stocks typically go down. Conversely, as we have seen, in an artificially low interest rate environment, stocks soar.
As for corporate profitability, when the economy is doing well and companies report strong earnings growth, their share price rises. During a recession, profits slip and share prices are penalized.
That hasn’t happened this time around. Stocks have continued to climb even in the midst of an earnings recession. Investors have also rewarded companies with higher valuations simply for not losing as much money as they thought they would.
Ideally, stocks and their valuations would follow the mean. But as we have seen, stocks and valuations are not running in step. Stocks are significantly overvalued and there is every reason to believe the U.S. will face an economic crisis in 2017 and stocks will collapse.
Interest rates are going up, corporate profitability is anemic, the U.S. economy remains fragile, global growth is underwhelming, Americans are unable to find good jobs, the participation rate is near record lows, and Americans are deep in debt and have little to no emergency funds.
An economic collapse would mean Americans cut back on spending, which would undermine overvalued stocks, leading to another stock market crash.
