In a 2 part series on Bloomberg Gary Shilling has built his case for recession in 2012 (read part 1 here and part 2 here). He says the consumer is weaker than many presume and that headwinds are building the will lead to declines in corporate profits and employment. The key points in this recession argument via Shilling:
- Consumers Are the Linchpin: The U.S. economy is being fueled these days by strong consumer spending, which increased in February by 0.8 percent, its best showing in seven months, after rising 0.4 percent in January. Retail sales rose 1.1 percent in February — the fastest pace in five months — while same-store sales advanced 4.7 percent. These numbers correlate with recent gains in consumer confidence and sentiment. I don’t see this pace continuing.
- Spending, Saving and Debt: The support that consumer spending has received from less saving and more debt appears temporary. Household debt — including mortgages,student loans, and auto and credit-card loans — has fallen relative to disposable personal income, though. In my analysis, this is largely because of write-offs of troubled mortgages. Nevertheless, revolving consumer credit, mostly on credit cards, is no longer being liquidated.
- Housing activity remains depressed, with the only signs of life coming from the multifamily component, which is being driven by the appetite for rental apartments as homeownership declines. Homeowners are losing their abodes to foreclosures; many can’t meet stringent mortgage-lending standards; some worry about homeownership responsibilities in the face of job uncertainty; and many have no desire to buy an asset that continues to fall in price.
- What Oil Threat?: Recently, there has been great concern about $4 per gallon gasoline and whether, as in 2008, those high prices will act as a tax on consumer incomes and force drastic cutbacks in other purchases.
- Job openings: The U.S. has a lot of job openings, but having endured huge layoffs in recent years, employers are being very picky in new hiring. Contrary to Federal Reserve Board Chairman Ben S. Bernanke’s assertion that high unemployment is mainly a cyclical concern that will be solved by economic growth, I believe that a big part of the problem is structural.
- Business Cost-Cutting: During the sluggish business recovery that began in mid-2009, sales-volume increases for U.S. business have been tiny, and the ability to raise prices was very limited even as commodity and other input prices climbed until about a year ago. As a result, profit margins were threatened. Meanwhile, foreign competition has been fierce.
- Corporate earnings implications: More jobs are about the only spur to household incomes, and consumer spending is the only source of strength in the economy this year. If new employees spend their paychecks freely, they could create more consumer demand, additional corporate revenues and profits, more jobs, and so on, in a self-feeding cycle. But, as I discussed in Part 1, new and old employees are more likely to retrench and precipitate a recession.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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