This Pattern Joins the Mounting Evidence for Recession 2013

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Don't worry about scanning headlines every day to determine the U.S. economy's chances of entering a recession in 2013.

We already know the answer.

Such indicators as gross domestic product (GDP), consumer spending, durable goods and exports all point to an economy not in a slow recovery, but on the verge of a 2013 recession.

That's because the trend lines, rather than showing gradual improvement, are moving in the opposite direction. The economy, after spending months with its head just barely above water, is about to go under.

The U.S. Commerce Department last week revised second quarter GDP sharply downward from 1.7% to 1.25%. The GDP was 1.9% in the first quarter of 2012. While we do not yet have any official data for the current quarter, a Federal Reserve Bank of Philadelphia survey of forecasters in August put the number at 1.6%.

That's an ominous pattern.

James Pethokoukis of the American Enterprise Institute explains: "Research from the Fed ... finds that since 1947, when two-quarter annualized real GDP growth falls below 2%, recession follows within a year 48% of the time. And when year-over-year real GDP growth falls below 2%, recession follows within a year 70% of the time."

The Mounting Evidence for Recession 2013

There's actually a term for what we're experiencing: the "stall-speed economy." It's roughly defined as a period of two or more quarters in which the GDP remains mired below 2%.



And the headline GDP numbers only tell part of the story. All too many economic indicators are flashing a warning that growth will slow down even more.

Here are three pieces of the GDP that show how the economy is getting slammed from several directions:

  • Durable Goods Orders plunged 13.2% in August, the worst one-month drop since January 2009. The drop keeps this statistic on a trajectory that echoes previous recessions. Durable Goods indicates the health of the manufacturing sector.
  • Consumer Spending was up $500 million in the second quarter, but that number was revised downward 90% from the previous Q2 estimate. Consumer spending makes up about 70% of the GDP.
  • Exports decreased $300 million in the second quarter, a 110% decrease from the previous Q2 estimate. That's bad for U.S. corporations, which rely on exports for more than one-third of their profits.

In addition to the GDP data, there's plenty of other evidence pointing to a 2013 recession:
 

  • The Philly Fed's Survey of Coincident Indicators, a mix of state-level wage and employment data, has dropped to +24 from +80 just three months ago. This indicator has averaged +41 in the three months preceding each of the past five recessions. The latest drop puts this indicator into recession territory.
  • Earnings warnings from corporations have been on the rise since mid-summer. Most recently, key companies like FedEx Corp. (NYSE: FDX), Intel Corp. (Nasdaq: INTC) and Caterpillar Inc. (NYSE: CAT) have issued warnings. The ratio negative outlooks versus positive is 4.3-to-1, the most bearish since Q3 of 2001.
  • The Dow Jones Transportation Index has fallen 5.88% in the past three months, while the Dow Jones Industrial Average has risen 5.19%. Railroad and trucking companies have been reporting lower shipping volumes in recent months - another sign of slowing economic activity.
  • QE3, or QE Infinity, the Federal Reserve's latest plan to pump billions of dollars of new liquidity into the country's financial system, was hailed as a positive for the stock market. But the Fed would only take such an extraordinary measure if it anticipates a lot of economic ugliness ahead.

Even if such a tottering economy isn't quite weak enough to tip over on its own, all it takes is a little push from an external shock, such as the Eurozone debt crisis.

While recession 2013 may be inevitable, investors do have options - and time - to protect themselves.

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