A Recession Could Be Coming in Late 2018 or Early 2019
It could be very difficult for the U.S. economy to avoid a recession in late 2018 or early 2019.
Before going into any details, there are two things that investors must know:
- A recession is when gross domestic product (GDP) declines for two consecutive quarters. In general terms, it’s when economic activity slows down.
- The U.S. GDP is calculated using four factors: consumption, investment, government spending, and net exports (in simple terms, that’s the difference between imports and exports. A positive net export number adds to GDP and a negative number lowers it.).
Now the details…
As it stands, three of the four factors that impact GDP are declining. With this, it has to be asked how the U.S. economy could avoid a recession.
Consumption Statistics Say That Troubles Are Ahead for the U.S. Economy
First, look the consumption statistics. They call for a recession sooner rather than later.
See the chart below. It shows the year-over-year changes in monthly real personal consumption figures. That’s personal consumption adjusted for inflation.
(Source: “Real Personal Consumption Expenditures,” Federal Reserve Bank of St. Louis, last accessed May 30, 2018.)
In early 2015, personal consumption in the U.S. was growing at over four percent. Now this growth rate is just 2.4%. So, one could say that personal consumption growth has decelerated by more than 40%.
Lower Government Spending to Impact U.S. GDP?
Next, look at the U.S. government spending figures.
The chart below shows the year-over-year changes in government spending on a quarterly basis.
(Source: “Government total expenditures,” Federal Reserve Bank of St. Louis, last accessed May 30, 2018.)
Government spending has substantially declined from what it used to be. The gray-shaded area on this chart represents the last U.S recession. Back then, government spending was growing at over 12%. In the first quarter of 2018, that rate was 3.5%.
With President Trump in office, it’s possible that government spending could decline a little more. This could have consequences for U.S. GDP.
Net Exports Declining to Lowest Level Since 2008
The third and final factor worth watching is net exports.
Look at the chart below. It plots the quarterly net exports.
(Source: “Net Exports of Goods and Services,” Federal Reserve Bank of St. Louis, last accessed May 30, 2018.)
In the first quarter of 2018, the annual rate of net exports stood at -$640.7 billion. In other words, for 2018, net exports would take away more than $640 billion from U.S. GDP. Mind you, this is the highest level of exports since 2008!
Here’s one more thing: currently, the U.S. administration is on the edge of a trade war with major trading partners like China. This could hurt U.S. exports further, and obviously would weigh down the GDP.
U.S. Economic Outlook: A Recession Could Be Nearing
Dear reader, ignoring economic data could be very big mistake. Don’t listen to the noise that says everything is fine. The data is very loud and clear in stating that the U.S. economy could be headed toward a recession.
For investors, this could be a very critical time.
Understand that stock market tops tend to happen before recessions. If we are to assume that the U.S. economy will enter a slowdown in late 2018 or early 2019, we could be just a few months away from a top.