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The “R Word” Is Here and Now
As politicos focused on South Carolina and Nevada, my company was running a weekend roundtable for business owners, where we train and break bread with real people facing real challenges due to the real economy. These people aren’t statistics. They aren’t categorized or sliced and diced into compartments that make up an axis on some government chart. The employees they have laid off don’t consider themselves as U3, U6, or U12. They are real people with real families and real bills.
It is not news that many sophisticated business owners consider the “recovery” weak, at best, and think the economy is most likely in recession. While the equity markets bounce around like a beach ball in the stands of a sporting event, the real fundamentals are causing pause for even the most bullish among us. Now Bloomberg Business reports that recession is already here in several states.
The U.S. States Where Recession Is Already a Reality
As economists size up the chances of the first nationwide slump since 2009, pockets of the country are already contracting. Four states — Alaska, North Dakota, West Virginia and Wyoming — are in a recession, and three others are at risk of prolonged declines, according to indexes of state economic performance tracked by Moody’s Analytics.
Bloomberg refers to Louisiana, New Mexico, and Oklahoma as also at risk of recession, according to Moody’s. In addition, the strengthened dollar has caused manufacturing states to contract:
A second blow to regional economies is the dollar’s surge – which is weighing on U.S. producers that compete globally. Illinois, Wisconsin, Louisiana and Mississippi — manufacturing states hurt by the currency’s march higher — have all had economic declines in the past few months.
Growth in Texas has slowed with falling oil prices, though the state continues to expand because of a diversified economy including technology jobs in Austin and development in Dallas.
While energy prices are the primary concern, consumer spending continues to support the economy from entirely falling into recession, for now. Economists refer to falling energy prices as a boon for consumers, but cannot understand why this has not resulted in the expected increase in consumer spending.
Recent reports show a small increase year over year (3.1%), yet the increase is primarily seen in people trading in cars for new, lower priced leasing deals.
Barry Ritholtz (follow him!) suggests there are three reasons we can point to: “falling gas prices, the aging of America’s auto fleet and credit availability.” Remember, BLS counts car leasing in its Consumer Pricing Index. While this looks good on paper, it is further proof people are cutting costs not spending more, and in fact increasing their debt service in an effort to lower monthly costs.
While lower gas prices are great in a vacuum, it has no effect when all other costs are going up. Our weekend group all pointed to increased costs and regulations of small business, most pointedly health care, which takes a bite out of the already shrinking margins of companies, not to mention the increased premiums and deductibles that take a further bite out of the family budget.
A recent report from McKinsey & Company found premiums for the lowest-cost Obamacare plans across all tiers (bronze, silver, gold, and platinum) increased 10-13% for 2016. The lowest-priced silver plans, which account for fully 70% of the exchange market, increased by 11% — four percentage points higher than 2015 plans.
But what about all those people with subsidies? Are they not benefitting?
Simply put, no. Forbes reports:
As for the subsidies, they’ll do nothing to cover the average deductibles of $2,927 and $6,010 for individual and family silver plans obtained through the exchanges. According to a March 2015 study from the Kaiser Family Foundation, less than one-fifth of low-income families can afford such high deductibles, while just over half of middle-class families can afford them.
As the media focus on Trumpgasms and Hillary’s scandals, candidates would do well to remember what is really important to the voters: Their pocket book, which is thinning quicker than the ice under the American economy.
Published in EconomicsAnother Broken Record… #tcothttp://t.co/I0JVaBoUxz
See more cartoons at: http://t.co/evyfYeu3cc pic.twitter.com/rK0VuhuKFq— Michael Ramirez (@Ramireztoons) October 8, 2015
Great report David. Thanks for putting it together.
I concur (except for the Ritholz plug). GDP is a lagging data point. I think we meet the official criteria for recession before year’s end.
What so many have missed is that this recovery was almost entirely born of the energy boom. The majority of jobs lost were very good paying blue collar jobs. I think the jobs lost outweighed the reduction in fuel costs.
Finally you tie that back nicely to our self imposed health care crisis.
I’m pretty much a naif on this sort of thing. How much does a company like Apple drive our economy and is it’s falling stock price a reflection of the Big R?
If I see stop work occurring on their new headquarters down the way I’ll know we’re in trouble for sure.
Hillary’s election chances will be badly hurt if the rest of the country does slip into recession. She’s lashed herself to Obama so tightly that she’ll go down with his ship.
This is a fantastic snapshot of where we are. Thank you.
It confirms what I hear from friends and acquaintances.
And it is troubling.
Enter Trump and Sanders. People are upset, confused, angry, and feeling unable to plan for the future.
PS: This is not a number anyone could ever calculate, but I also believe that many people are actually forgoing healthcare more than ever before, despite and because of the higher premiums, higher costs of that care, higher deductibles, and lower benefits. ObamaCare was supposed to save lives. I have a feeling it is exactly the opposite.
I don’t see it in my area. We are having a boom right now led by technology (we are a low cost, high quality of life, location for software and technology firms). All the states that are in recession that you mentioned are dependent on energy.
I don’t think one company can determine how the economy moves, although one company’s failure can be the speartip of other indicators. For example, when GM was in trouble, the entire car industry including dealers, suppliers, and vendors were all in trouble.
Richard, the problem is our economy is now so tied into politics. The Fed are surrounded by politicians and this administration is determined to drag the economy across the election finish line without a technical national recession.
Absolutely correct. “31% of Americans report that they’re putting off healthcare because of its high cost, and that percentage hasn’t budged since Obamacare’s implementation.”
Cúal es problema con Ritholz?
I knew this had to be happening!
Sigh.
I hope the current election gets around to what is really bothering people these days.
Thank you.
Superb recap of the current situation. As someone working for a global manufacturing company, it’s spot-on analysis.
Based on where the economy is now, David, will these conditions have an impact on the outcomes of the primaries ahead? Do you foresee it helping or hurting any of the candidates (besides Hillary, mentioned earlier)?
He does nice work digging up data and statistics not usually considered in the mainstream, but he is a hardcore Keynesian. The answer is always more fiscal/Fed stimulus with no downside.
How you see that? I am sure she can separate herself from Obama and Obama from the economy. Their whole shtick is that Bush, the Republicans and big business own the economy and that Obama and crowd are saving everybody from those evil beings. If the economy goes deeper into the great R they will sell everybody that it is Bush’s fault and only socialism and Obamacare will save them.
“this administration is determined to drag the economy across the election finish line without a technical national recession.”
Great line and a good post David. I can’t think of any part of our economy this administration hasn’t fiddled with and in so doing made worse.
Which raises the question why in heck don’t we have a candidate talking JOBS? Everything candidates are talking and raging about is really only a symptom or fall guy for our failing economy.
Lots of people have talked a double-dip recession for years now, based on a lot of metrics, including, these two, which are directly related to demand for employment:
Labor force participation rate (at historically low levels)
Median household incomes (still stagnant/dropping)
GDP is consumption, investment, government spending, and net exports. With stagnant incomes, less consumption, less demand = fewer jobs. It’s a negative feedback loop.
Companies don’t maintain production at high levels nor maintain carrying inventory because the demand’s not there in their forecasts. So new tooling, capital expenditures, are reduced – no reason to build a plant if fewer people want that widget.
Lastly, Barry’s been talking up the economy in the past but not so much now, because his talking point has been the Wall St recovery (to a point), which was almost entirely made from quantitative easing/fed monetary policy. He talks about job gains made in aggregate numbers, but fails to mention the majority of job gains are not in manufacturing or professional services, they’ve been in the service industry, and gov’t.
The economy’s a mess. Turns out that “stimulus” spending is a catastrophic waste of money, and is probably a key contributor to the recession due to the misallocation of dollars based on political goals, and not markets. Couple all that with an increase in out of pocket expenses for healthcare (thanks to Barry’s promise of reducing the bill by $2,500/year thanks to the magical glory of government and its employees fixing things for you), and you have reduced aggregate demand, and a recession.
It’s not that hard to follow. It’s actually harder to parse out and deconstruct the lies spun for political advantage than it is to look up some key stats at the Fed Reserve website for yourself. Here’s one:
Agreed. He has been know to argue for the Keynesian line about not waiting for a crisis or crash for austerity, but when things are good we should tighten our belts. Then again, is that Keynesian or Austrian? I don’t know anymore. Keynesian capitalists are a strange breed. I think he is as Keynesian as Warren Buffet, which, on paper is a hybrid.
Susan, good question. If I had a dollar for every time I correctly predicted the economic impact of an election I may have enough for a cup of coffee (freeze dried).
I didn’t expect this administration to be able to kick the can for almost 8 years. But they have, thanks to Bernanke (and now Yellen). I feel like we have been running from a tidal wave, but the water is now lapping at our ankles.
Voters are a rare breed. As said in this or some other post, until events can no longer be ignored by the media, they will ignore anything that could potentially hurt the Left. Throw in a few 700 point Dow drops and they will have to report on it and people will awaken. Meanwhile, it’s Trump TV which is fast food for the brain. People like fast food.
I am hoping they will focus on the economy soon. It’s a selling point for the GOP. After all, it’s been almost 8 years since the financial crisis, and the GDP hasn’t gone beyond ‘meh’. EIGHT YEARS! I mean, there should have been at least a few 5% quarters out of 32, no?
Excellent Chris. We fish from the same pond. Thanks for the Fed chart which illustrates the dichotomy.
I will say that ZIRP being reversed late last year and the resulting mess on WS since proves the addiction to free money has been a net negative, as we do have to ween ourselves from the spiked punch bowl soon. Not to sound like William Devane, but there’s a storm coming. Question is, will it occur before or after the election?
Recession isn’t the right word, even stagnation has ups and downs. This is stagnation caused by the government and the Fed. To call it recession invites the government or the Fed to make it worse which is what they do. Remove the distortion of spending that keeps people poor and dependant, dead weight of a corrupt opaque unfathomable tax code and the even more damaging suffocating regulatory apparatus.