Last Friday, the Commerce Department revealed a concerning update: both private sector wages and government benefits experienced a decline in August. This unexpected downturn marked the first monthly drop in overall personal income since October 2009, indicating that many individuals found their financial situations worsening rather than improving during that time.
Additionally, on the same day, the Economic Cycle Research Institute (ECRI), a respected authority on business cycles, reported disconcerting trends in their most reliable forward-looking indicators. They suggested these indicators are behaving similarly to those observed just before significant recessions, rather than indicating a soft landing. While ECRI could be mistaken, they have accurately predicted the last three recessions without generating false alarms. Here are several troubling insights from ECRI on what may lie ahead…
“A new recession isn’t merely a statistical anomaly. It represents a vicious cycle that, once triggered, must unfold. For example, a drop in sales can lead to reduced production, which then causes declining employment and income, ultimately resulting in even weaker sales. This cycle can spread across industries, regions, and various economic indicators. This is the essence of a recession.”
“It’s crucial to recognize that a recession doesn’t simply imply a struggling economy – we’ve experienced that for some time now. It signifies a situation where the economy continues to deteriorate, caught in a vicious cycle. This means the already high unemployment rate, above 9 percent, may increase even further, and the federal budget deficit, already surpassing a trillion dollars, will escalate.”
“In essence, ECRI’s recession prediction suggests that if you believe the current economy is bad, brace yourself; the worst is yet to come. This has significant implications for both Main Street and Wall Street.”
Implications for Main Street and Wall Street
At the Economic Prism, we advocate for a thriving economy over a declining one. A growing economy fosters an environment where personal wealth can increase. In flourishing times, well-paying jobs are abundant, allowing even those who are less industrious to maintain their livelihoods with minimal effort. In such scenarios, everyone benefits from the rising tide of economic prosperity.
Conversely, in a contracting economy, even the most diligent and skilled individuals may struggle to uphold their standard of living. Despite putting in long hours and demonstrating strong work ethic, they might see their financial situations deteriorate. Meanwhile, those who are less committed face significant challenges.
Simultaneously, the stock market reacts unpredictably to economic downturns, with sharp fluctuations leaving novice investors feeling whipsawed. Experienced traders may capitalize on this volatility but only when it doesn’t turn against them.
For 401K and mutual fund investors, navigating the market is akin to a tumultuous rollercoaster ride, often ending up right back where they started. Unfortunately, they tend to have a propensity for buying high and selling low.
As the recession progresses, older workers may find themselves watching helplessly as their retirement accounts dwindle, along with their dreams of a secure retirement. At the same time, young, entry-level job seekers burdened with student loan debt will struggle to enter the workforce. How severe will this downturn become?
Truthfully, no one can predict this with certainty. However, if ECRI’s analysis proves accurate, we may be facing a substantial recession, likely accompanied by increased social unrest, similar to the ongoing Occupy Wall Street protests.
Re-entering the Vicious Cycle of Recession
This week may provide further insights into what we can expect. On Friday, the Labor Department is slated to release data on job growth for September. It seems unlikely that the report will indicate sufficient job creation to reduce the unemployment rate, which stands at 9.1 percent.
If the cycle of recession gains momentum, we can anticipate decreased service and manufacturing activity alongside rising unemployment. With higher unemployment, consumer spending is likely to wane, which will further suppress service and manufacturing industries, creating a self-perpetuating cycle. Ultimately, the recession may redirect the economy to focus on meeting consumer demands at more affordable prices, paving the way for new job creation that supports a revitalized economy.
In the interim, there’s little the Federal Reserve can do to remedy the situation. Monetary policy measures like purchasing treasuries with created funds will offer limited relief. With interest rates already at historic lows, consumers do not need more credit to accrue additional debt. Furthermore, the strategy of keeping interest rates artificially low may be causing more issues than it solves.
Last Wednesday, outgoing Kansas City Federal Reserve Bank President Thomas Hoenig remarked, “When you incentivize consumption by restricting interest rates from reaching their natural levels, you end up inviting problems, and indeed, we have accumulated problems.”
Since the financial crisis of late 2008, the Fed has slashed the federal funds rate close to zero and purchased upwards of $2 trillion in treasuries. Now, after what may be the weakest recovery on record, the economy appears to be heading back into recession. However, with the Fed out of ammunition, it’s now up to the President and Congress to take action.
Given their past performance, we would prefer they don’t.
Sincerely,
MN Gordon
for Economic Prism
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