Each month, the Conference Board publishes its index of Leading Economic Indicators, which has been on the rise. The stock market is one of 10 leading indicators and the S&P 500 is up 30 percent since July 2. Can we take comfort in knowing that the economy is getting better? There are at least four good reasons why a second recession is likely.
1. Energy – Recent turmoil in Egypt caused some volatility in energy prices. After President Hosni Mubarak stepped down, oil prices eased. Yet oil was on the rise long before revolution was in the air in Cairo. In mid-2008, crude oil prices topped $140 per barrel. By the end of that year, they had plunged to just over $30. Oil has since crawled back to about $85 per barrel and the nationwide average retail price for gasoline is well over $3 per gallon. While it’s nice to think that alternative fuels will save the day, the fact is that the U.S. economy will remain dependent on oil for years to come. If gasoline tops $4 per gallon, as it did in 2008, a double-dip recession is all but guaranteed.2. Employment – The most recent unemployment rate is 9.0 percent, down from a peak of 10.1 percent in October 2009. That’s certainly a move in the right direction, but the rate remains much too high this long into a supposed economic recovery. Nonfarm payrolls have expanded four months in a row, up 131,000 in October, 93,000 in November, 121,000 in December, and 36,000 in January. Notice, however, that the trend is getting worse, not better. During this period, the economy created an average of just 95,000 jobs per month. At this rate, it will take an additional six-and-a-half years just to regain all the jobs lost since January 2008. Meanwhile, the population is rising by about 2.5 million each year. Assuming that at least some of these new Americans would like to work, job creation is nowhere near where it needs to be.
3. Housing –There are still too many mortgage delinquencies and foreclosures, and too much inventory on the market. Buying a house could prove to be a bad investment for years to come. In the past, home buyers could count on at least a certain amount of appreciation and they gave little thought to property taxes. These days, appreciation is more hope than certainty, and in many parts of the country, property taxes have become a significant and rising proportion of the overall expense of owning a home. Property taxes can now outweigh the mortgage payment, insurance, and maintenance and repairs. To make matters worse, mortgage rates have been ticking up. While housing prices might be near bottom, with so much inventory on hand, prices could remain flat for years. If employment fails to strengthen, housing prices could go even lower.
4. Politics – President Obama has moved a bit closer to the political center, but still shows too little willingness to address the real issues holding back the U.S. economy. The same can be said for most politicians of both political parties. Instead of proposing spending cuts that have a real impact on the debt and deficit, the president and Congress are targeting little things that are easier to accomplish but mostly meaningless. It’s a bit like the man who drops a sack full of money. Instead of picking up the hundred dollar bills, he chases after the few pennies that are rolling away. Unless politicians find the will to address important issues such as Social Security, Medicare, Medicaid, and pension liabilities, there is no hope that federal, state, and municipal governments will get their financial houses in order. When lenders decide it’s time to stop funding our growing deficits, watch out for higher interest rates. That could be more than enough to cause the dreaded double dip.
Of course, stocks could still go higher. In the short run, sentiment is often more important than fundamentals. Yet with these serious fundamental issues looming (not to mention a good chance of rising inflation if the Fed falls behind the curve), it is increasingly difficult to remain bullish in the long run.
