Every day, it looks more and more like we’re headed for bear country. Here are 8 key signs that we’re a long way from an economic recovery.
Stocks are flirting with a 20 percent decline from market highs in April. A 20 percent decline is the generally-accepted definition of a bear market, and it looks more and more like we’re headed for the dreaded bear country. Here are 8 key signs that we’re a long way from a recovery:
1) The ECRI. There’s just one institution that can legitimately claim to have “never been wrong” at predicting a recession. That’s the Economic Cycle Research Institute (ECRI), and last Friday they sounded the warning bell. “Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession,” the company wrote on its Web site, “and there’s nothing that policy makers can do to head it off.”
If the ECRI is right this time, they’re predicting the official unemployment numbers could rise from 9 percent as high as 15 percent. That would put the “unofficial” unemployment numbers closer to 25 percent.
2) “Close to faltering.” Even Federal Reserve chairman Ben Bernanke acknowledged widespread weakness yesterday when he warned the U.S. economy is “close to faltering.”
“Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” Bernanke told Congress. He hinted that the Fed is prepared to take more action if things worsen. The markets liked that, but it’s a clear indication that we’re far from out of the woods.
3) Manufacturing contraction. For the first time in two years, the Global Manufacturing PMI dipped below 50 – the cut-off line that differentiates growth from contraction. The measure hit 49.9 in August – a low we haven’t seen since June 2009. Things are even worse in Europe where the manufacturing index fell below 50 for the second month in a row.
4) Death to the Hang Seng? Hong Kong’s Hang Seng Index, which includes shares of many of China’s largest companies, sealed up its worst quarter in a decade when the market closed on Friday (per BusinessWeek). All told, the index shed 22 percent in three months. Hang Seng shares haven’t seen losses that steep since September 2001.
5) European contagion. Goldman Sachs slashed their forecasts for U.S. growth in the first quarter of 2012 to a paltry 0.5 percent. “The European crisis threatens U.S. economic growth via tighter financial conditions, reduced credit availability and weaker growth of U.S. exports to the region,” Goldman economist Andrew Tilton said (per the Financial Post). “This impact is likely to slow the U.S. economy to the edge of recession by early 2012.” Late last week, Goldman also published a report arguing that developed markets don’t just face a downturn but rather have a 40 percent chance of economic stagnation for the next five years.
6) Greek debt default looms. Yes, the EU’s frantically trying to find some way to stop Greece from defaulting on its debt, but the long-term picture for the country doesn’t look good. If they don’t get a bailout by November, Greece will have to start defaulting on pensions, salaries and bonds (per CBS). Even if they do get a bailout, it’s unclear how the government will be able to manage a debt load that stands at 150 percent of GDP. Recently, investors grew so pessimistic on three-year Greek bonds, the interest rates rose above 100 percent.
7) Class warfare. Doom and gloom newsletter writers have been talking for years about the coming civil unrest in the U.S. It’s something I’ve started realizing doesn’t just happen in other countries. Protests in Greece and Italy are so common they rarely make the international news. And now, Wall Street’s dealing with its own set of protestors. In a matter of weeks, Occupy Wall Street has spread from New York to Chicago, Los Angeles, Seattle and Boston. Now, several unions are getting in on the act, too (per CNN). High unemployment and a lack of opportunities leads to civil unrest – no matter where you live.
8) Down with bonds. Moody’s downgraded Italy’s government bonds yesterday from Aa2 to A2 (per the Financial Post). Funding’s getting harder and harder to get for the weakest European governments, and that means they’re going to be forced to slash their spending. That doesn’t bode well for consumer-driven economies abroad or at home.
Official government numbers may not show that we’re in a recession yet, but the signs are clear. In the words of ECRI co-founder Laksman Achuthan, “you haven’t seen anything yet.”
“A new recession isn’t simply a statistical event,” Achuthan writes. “It’s a vicious cycle that, once started, must run its course. Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator. That’s what a recession is all about.”
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