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The Case For Recession Got Stronger This Week

GREELEY, CO - JANUARY 27: An oil field worker places well pipe on a rig in Weld County, Colorado, January, 27, 2016. With oil prices now tumbling into drilling in Colorado has slowed. (Photo by RJ Sangosti/The Denver Post)GREELEY, CO - JANUARY 27: An oil field worker places well pipe on a rig in Weld County, Colorado, January, 27, 2016. With oil prices now tumbling into drilling in Colorado has slowed. (Photo by RJ Sangosti/The Denver Post)
An oil field worker places well pipe on a rig in Weld County, Colorado. RJ Sangosti—The Denver Post

If the U.S. economy were a presidential candidate, you can bet that Donald Trump would label it “low energy.”

In the nearly seven years since the end of the Great Recession, American economic growth has never surged above “just okay,” and it appears that won’t change anytime soon. American investors are battling a sharp slowdown in once high-flying China and a near-bear market here at home. Increasingly analysts are worried that the turmoil might force the American economy into a recession, or worse, and these arguments were generally buttressed this week by a slew of disappointing data.

Friday brought the Commerce Department’s initial estimate of GDP growth, which came in at an anemic 0.7% real growth on an annualized basis, due largely to a shrinking of net exports—showing the effect of a strong dollar—and weak business investment.

That was paired with a report from the Labor Department, which showed that employee compensation grew just 2% year-over-year. While that is faster than overall inflation, it’s actually less than the increase in past year in core prices, which strip out volatile food and energy prices. That’s bad news for workers. While a core inflation rate of more than 2% is in line with Federal Reserve’s target, it would be better news for the economy if we saw wage gains outstripping overall inflation, as that would boost consumer spending power.

On Thursday, the Commerce Department announced that orders for durable goods fell sharply by 5.1% from November to December. Part of this was the result of the volatile civilian aircraft and defense sectors, which can show vastly different order figures month-to-month. But even removing these from the picture showed orders falling by 1.2%, with core capital expenditures falling by 1.1%. This gets at two problems facing the U.S. economy: the very strong dollar, which hurt exports, and the continued unwillingness of businesses to invest in new capital projects.

On top of that corporate profits have been coming in, and they have been weak. S&P analyst Howard Silverblatt noted that only 47% had higher sales than in the quarter than Wall Street was expected, lower than typical. Many of the companies that did report better than expected earnings appear to have done it based on cost cutting rather than sales growth. In all, profits for the S&P 500 companies are expected to have fallen 3.5% in the last quarter of 2015, versus a year ago. “The new word (and answer to how are you doing) on the Street now appears to be “struggling,” says Silverblatt.

Most economists still aren’t forecasting a recession this year. Employment growth remains strong, and even data released this week, like high consumer confidence figures the Conference Board give reason to hope that the recent sluggish growth in consumption is just noise. But on balance, this week provided more ammunition for the economic bears than it did for the bulls.