6 Reasons a Recession Might Be Coming
We are now seven years away from the last major recession. Considering that buffer, it is hardly controversial to suggest that we are closer to the next recession than we are to the last, but are we closer than we think? Here are six reasons why we could be just around the corner from a downturn, if it hasn’t already begun.
Start with the most obvious, China just reported “only” 6.9% growth for 2015, but the Chinese government has a sordid history of inflating economic figures going all the way back to the late 1950s. In other words, China’s GDP deflator is probably quite high. Chinese equity markets lost more than 40% value during the closing six months of 2015, and the few pieces of data we get suggest that fundamentals underlying the Chinese economy are indeed collapsing.
The headline figure at the moment is rail freight data that showed a 10.5% year-over-year decline. As Chinese demand for international exports shrinks, the bottom lines of the companies that support this demand will also. Major industry in the United States, Germany, Australia and Japan rely heavily on revenues generated through exports to China, and it won’t take too much of a dip in these exports to cause industrial contraction, downsizing, increased unemployment and so on.
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The Federal Reserve
In December the Federal Reserve finally raised the U.S. federal funds target rate. This is an action generally taken by the central bank of a strong, robust economy with moderate inflation. While superficial data suggests strength, including low unemployment and a booming real estate market, things may not be what they seem. Inflation is almost nonexistent, and despite the collapse in oil prices, consumer spending is flat. Real estate prices are at more than a four-times multiple of median household income. Mortgage approvals are up, meaning buyers are paying over the odds for property they wouldn’t be able to afford at higher interest rates. This sounds a little too familiar.
But the real problem is the Federal Reserve’s lack of tools with which to tackle a downturn if and when it comes. With rates already extremely low and having just come out of a huge asset purchase program, the Fed is effectively redundant in its ability to counter a recession, meaning when things fall, they could fall hard and fast.