Do you believe that another recession is imminent? If you’re the average American, then you probably don’t, because a recent Gallup poll has shown that consumer confidence has never been higher.
As of this writing, the Dow Jones Index has also never been higher at over 20,000 points. So everything seems to point to the situation being well and good. But is this confidence warranted?
Can the next recession actually be just around the corner?
Let’s take a look at some of the warning signs. First, average weekly hours are falling. The percentage decline we are seeing right now has only been lower during the previous recession.
Second, banks are tightening lending standards. And we’re talking all across the board here, from medium to large-size corporations, all the way down to the average Joe. Business Insider, sourcing from the Federal Reserve’s latest quarterly Senior Loan Officer Survey, also reports the following quote from two Deutsche Bank economists:
“Although modest over the past couple of quarters, it is still worth noting that this is now the sixth quarter in succession that standards have tightened for large and medium sized firms… This usually only happens in recessions.”
Banks have cited a “less favorable or more uncertain economic outlook” as the reason behind the tightening standards. On the consumer front, the tightening is even more drastic.
According to the Fed:
“The most notable tightening in standards though was in consumer loans. During the quarter, banks reported an 8.3% net tightening in credit standards for credit cards and 11.6% net tightening for auto loans.”
Considering the fact that consumer spending is two thirds of economic activity, and needless to say, an important growth factor, isn’t this something we should be worried about?
Despite the sky high consumer confidence, consumer economic activity might be noticeably slowing down, as evidenced by a couple different things. First, the slowing down of retail activity, as seen by the troubles at all the major retailers. Sears is dying a slow death, Macy’s just cut 10,000 jobs, The Limited closing all of its physical stores, plus the fact that in 2016, Sports Authority went out of business while PacSun, Aeropostale and American Apparel have all filed for bankruptcy protection.
Next, what about the fact that gasoline demand is falling for the first time in 5 years?
Typically it’s always been the supply side of things that have influenced gasoline prices, with factors in the demand side usually being positive, such as increasing demand from a hungry China. But if gasoline demand is falling at American pumps, what kind of sign is that for the economy?
Also, for the first time since the last recession, America’s largest companies have posted negative job growth. The graph below shows employment growth at S&P500 companies, which together account for just under 20% of total US employment.
On the other hand, small businesses are highly optimistic, with the Small Business Optimism Index at its highest level since the previous recession. So what we have here are small businesses and consumers at maximum confidence, while the bigger companies are showing signs that trouble is coming.
Which narrative will prevail, we wonder?
We will top off this article with one final fact: real median household income declined in 2016. That’s right, as reported by Sentier Research, median household income stood at $57,827 in December 2016 compared to $58,356 in December 2015.
Are the warning signs above nothing to worry about or does it indicate that our sky high confidence is just setting ourselves up for a bigger fall?
It is impossible to predict the future, but you can certainly prepare for it. Intelligent investors invest in safe haven assets such as gold or silver, long term stores of value that can be used as a hedge against the entire US economy.
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