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I hate to be a Debbie Downer to all of you who think things are going well with the U.S. economy. But there is a stark disconnect these days between consumer confidence and the economic health of the United States.
Last month the Consumer Confidence Index hit its highest level since December 2000. It dipped a bit in April but it’s still in the stratosphere. This optimism is baffling to me as economic activity is not keeping pace. Patrick Moynihan, the former US Senator from New York once said, “Everyone is entitled to his own opinion, but not his own facts.” And these are the facts:
Consumer Debt is Mounting
- Median household income adjusted for inflation is lower today than it was in January 2000. Compounding this problem is real average hourly earnings have actually decreased from February 2016 to February 2017 by 0.3 percent.
- As a result, consumers are spending less. Year over year retail sales for the past two quarters are down. And a substantial decline in auto sales is leading the way.
- Even with a slowing of retail spending, consumers are still taking on more debt. Since wages have not kept pace with the cost of inflation, consumers are going into debt to fund the standard of living they are accustomed to. Credit card debt has ballooned to record highs. Debt service as a percentage of disposable income is at the highest rate since the beginning of the Great Recession.
- Delinquency rates on auto loans, credit cards and student loan debt are all rising at alarming rates. The delinquency rates for subprime auto loans is at the highest level in seven years. Credit card debt levels are back to where they were prior to the Great Recession. Student loan debt now totals $1.3 trillion making it the second highest consumer debt category behind only mortgage debt. The average student loan debt for the Class of 2016 is in excess of $37,000. Delinquent student loan debt (defined as over 90 days late) totals over $30 billion or 23% of all student loan debt.
Business Activity is Slowing
- Factory inventories have risen seven out of the past eight months. This does not bode well for future production or employment.
- Business investments, measured as new orders for non-defense capital goods excluding aircraft, fell 0.1% in February.
- Auto sales declined 1.6% in March. Inventories are at the highest level in a decade.
- If the above statistics have not gotten your attention, this will. The Industrial Production Index, published by The Federal Reserve, covers manufacturing, mining, electric and gas utilities. The two year change in the IP index has been negative for the past 14 consecutive months. Since 1920 industrial production has been negative 17 times. Every time it has been negative a recession has occurred shortly thereafter. A batting average of 17 for 17 suggests that a negative IP index is an accurate predictor of a coming recession.
A Trump Bump Was Unrealistic
When Donald Trump was elected president, the electorate was hopeful that the new administration could drive the economy with tax cuts, infrastructure spending and regulatory reform. But in my January 19th article about my 2017 forecast for commercial real estate I said the following:
“Many economists will tell you that Trump economic policies will stimulate the economy but also have the potential for generating huge budget deficits. Let’s for the moment accept this as true. This assumes two things: 1) that the Trump administration is going to successfully pass through Congress their economic policies without any changes; and 2) that if passed that it will positively influence the U.S. economy this year.
I believe both assumptions are wrong. Any legislation that passes this year will be watered down either by deficit hawk Republicans or Democrats that team up with Republicans on policies that are deemed to favor the rich at the expense of the poor. More importantly, even if the Trump economic policies are enacted into law it will take months, possibly years, to feel the positive impact of those policies on the U.S. economy. It doesn’t happen overnight.”
Unfortunately, my prediction is coming to pass. During the first 100 days of President Trump’s administration they have not been able to pass any of their legislative agenda. The overhaul of Obamacare hasn’t even made it through the House yet, let alone the Senate. Tax reform has been delayed till at least this summer and pundits predict that nothing of substance will happen until next year, possibly later. Apparently, an infrastructure spending bill is not even on the radar screen. What happened to bi-partisan support for such a bill? Unfortunately, the economy needs the benefit of tax reform and infrastructure spending right now. Today would not be soon enough.
Recession is Looming
Understand this very important fact: The U.S. economy is 72% consumer driven. If consumer spending is slowing down then this economy is in for a sharp decline. It’s time to face the music. After 94 months of economic expansion, the economy is heading towards a slowdown. I doubt that the Trump administration can do anything to prevent the U.S. economy from sliding into a recession. I would love to be proven wrong. I don’t enjoy being the bearer of bad news. Two questions come to mind:
- When does it happen?
- Are you prepared?
Make no mistake about it, we are headed for a recession. When, is still up in the air. It could happen later this year or it may not happen till next year. It’s still anybody’s guess. Typically a recession is triggered by an adverse event that gets everyone’s attention. In 2008 it was the collapse of Lehman Brothers. In 2001 it was the sudden collapse of the dot.com bubble. What will it be this time? A sudden collapse of an over priced stock market? Turmoil in the Middle East? France voting to leave the European Union? Who knows?
More importantly as a commercial real estate professional or as an owner of commercial real estate are you prepared? Don’t stick your head in the sand wishing it would all go away. There is still time to get yourself ready. Forewarned is forearmed.
Sources: Student Loan Debt in 2017: A $1.3 Trillion Crisis by Zack Friedman, Forbes, February 21, 2017; Economic Indicators Are Flashing Warning Signs That The Economy Has Stopped – No One is Paying Attention by D. H. Taylor, Seeking Alpha, April 27, 2017; Personal Incomes and Consumptions Are Declining Pointing To A U.S. Economic Slowdown, by D.H. Taylor, Seeking Alpha, April 13, 2017; A Gathering Storm of Recession: Top 5 Indicators, by J.G. Collins, Seeking Alpha, April 21, 2017; Auto Loans and Household Income – Time for A Reality Check!, by Tematica Research, seekingalpha.com, March 28, 2017; Closing In On Zero Growth, by Lawrence Fuller, seekingalpha.com, April 10, 2017; The Last 17 Times This Happened There Was A Recession, by Eric Basmajian, seekingalpha.com, April 18, 2017.