Reuters / Marcos Brindicci
Despite a surge in optimism after the election, nominal GDP growth in 2016 was just 2.95%. This makes 2016 the second-worst year on record since 1959.
And with key economic indicators flashing warnings signs,it looks like the US economy is heading toward big trouble rather than revival.
Here are four signs that paint the picture best.
Credit Demand Is Contracting
Across all the sectors of bank lending (business, consumer, and real estate), credit demand is falling. The chart below shows a sharp decline in consumer loan growth over the past three quarters.
The pent up demand seems to be exhausted. Given that this economic expansion is now in its ninth year, it’s no surprise.
With consumption accounting for 70% of US economic activity, this will weigh heavily on growth.
Tax Receipts Turn Negative
Another indicator that signals the US economy is on a slippery slope is falling corporate tax receipts.
The chart below shows corporate receipts in April contracted most since 2009, when the economy was in midst of the Great Recession.
As Dr. Lacy Hunt, EVP of Hosington Investment Management and former senior economist for the Dallas Fed stated during hisSIC 2017 presentation: This indicator has turned down prior to every post-WWII recession. It suggests that America’s corporations are experiencing a deterioration in earnings.
The Fed Walks a Tightrope
While consumer demand and economic activity are trending downward, the Fed is tightening monetary policy, which exacerbates the negative effect.
Ten out of the last 13 tightening cycles have ended in recession. In fact, of the 18 recessions since 1913, all but one have been preceded by a tightening cycle.
And here’s why.
Higher interest rates increase the cost of credit, which reduces demand and weighs on economic growth. Dr. Lacy Hunt also made another good point regarding the Fed’s move: When the Fed tightens, they are saying the economy is doing too well by our standards we want the economy to have less money and credit growth and we want less economic activity. They are saying this at a time when the best economic indicators are in a downturn.”
And the bond market seems to agree with Dr. Hunt that the Fed has got it wrong.