Business Inventories Dwindling, Which Says a Recession Could Be Nearing
It’s critical to watch the U.S. economy. The case for a recession coming sooner rather than later is becoming stronger by the day. Remember, if a recession becomes reality for the U.S. economy, a stock market top could be nearing as well.
One could ask, “How could you say we are nearing a recession when there’s optimism and economic data isn’t that bad?”
You see, watching the leading indicators is very important.
It can’t be stressed enough, a lot of economic data we see on a regular basis—and which the mainstream media rallies behind—is lagging data. It tells us what has already happened in the economy, not what could be ahead.
One data set that’s worth watching is business inventories in the U.S. economy.
Before going into any details, know this: yes, business inventories are the previous month’s figures. But the trend tells us what businesses in the U.S. are thinking.
Businesses build up inventories in anticipation of demand. If their inventories are declining, it means the businesses may not be so optimistic about the future.
With this said, please look at the chart below. It shows the year-over-year change in monthly total business inventories.
(Source: “Total Business Inventories,” Federal Reserve Bank of St. Louis, last accessed March 9, 2018.)
Notice the trend? After the Great Recession, businesses ramped up production and built up inventories.
In late 2010 and early 2011, right after the U.S. started recovering from the recession of 2007–2009, business inventories soared, and rightfully so. Robust economic growth was expected to follow.
But something changed in 2012. We have been noticing that inventory growth at U.S. businesses continues to dwindle. The growth rate was close to 12% in early 2011.
Now, the growth rate has declined to 2.64% and the overall trend is pointing toward further slowing. This is a very serious deceleration.
At its core, the inventory growth rate declining suggests that businesses aren’t so optimistic about demand and that they could be expecting a slowdown ahead.
U.S. Economic Outlook: Recession Could Be Bad for Stock Investors
Dear reader, don’t get lured by the mainstream narrative that’s overly optimistic these days.
The leading economic data is very clear that the U.S. economy could be taking a turn for the worst and that a recession could actually become reality soon.
While the data is turning dismal, remember that the Federal Reserve is raising interest rates. Economics 101: higher interest rates are used to cool down an economy. So the Fed is actually trying to slow down an already stalled economy.
Keeping all this in mind, I can’t help but be pessimistic about the U.S. economy. I can’t stress this enough: a recession for the U.S. economy is looking like a real possibility soon.
Nowadays, no matter who you listen to, we are told that stock markets could go higher. However, you must know that stock markets are essentially a function of the economy. They tend to top just before a recession, fall once the data becomes clear about an economic slowdown, and bottom just before the economy starts to recover.
If we say that a recession is nearing, one could say that a stock market top could be nearing as well. Investors beware.