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.
Protect Yourself From Recession 2013
Martin Hutchinson, editor of the Permanent Wealth Investor newsletter and Money Morning's global investing strategist, has several suggestions for investors to prepare.
One is to invest in those countries not suffering recession, such as emerging markets or Japan. In Japan, Hutchinson likes Orix Corp. (NYSE: IX). Hutchinson also likes the Aberdeen Chile Fund (NYSE: CH).
Domestically, Hutchinson says investors should seek out dividend aristocrats – stocks that have consistently paid out and raised their dividend for 20 years or longer.
"These types of stocks represent the ultimate safe haven for your money," Hutchinson said. "Their share price and even earnings may decline, but their dividends should continue to increase."
Hutchinson singled out four particularly strong dividend aristocrats — companies that have paid or increased dividends for 50 years or more, and pay a dividend yield of at least 3.5%.
- Procter and Gamble Co. (NYSE: PG) has increased dividends every year since 1954. This huge household goods company pays a dividend yield of 3.7%;
- Northwest Natural Gas (NYSE: NWN) has increased dividends every year since 1956. With a dividend yield of 3.7%, the company stores and distributes natural gas in Oregon, Washington and California;
- Emerson Electric (NYSE: EMR) has increased dividends every year since 1957. This worldwide engineering services and solutions company pays a dividend yield of 3.5%;
- Cincinnati Financial Corp. (Nasdaq: CINF) has increased dividends every year since 1961. The property and casualty insurance company pays a dividend yield of 4.2%.
"Having survived every recession since 1962, they can be expected to survive the next one," Hutchinson said.
Hutchinson has cautioned, however, that you shouldn't think simply picking a stock with high yield alone is the best way to recession-proof your portfolio.
In fact, since Hutchinson knew the economy would enter recessionary conditions, he built a detailed strategy that not only preserves your wealth, but can make you money over the long-term.
Click here to check out Hutchinson's plan for creating a permanent income stream for any environment.
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- Money Morning:
Recession 2013 Is On the Way; Here's What Jim Rogers is Doing
- The Wall Street Journal:
GDP Revision, Durable Goods: Ouch!
U.S. recession signal from the Philly Fed
Analysis: Dow transports raise warning flag for U.S. economy
- Forex Pros:
GDP And Durable Goods – Heading To Recession?
- The Wall Street Journal:
The Stall-Speed Economy
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.