Declining Household Spending Could Signal Another Recession Is Just Around the Corner

Economists say the chances of another recession are rising, and all the signs are there. Economic growth slowed in the second quarter to a pace that has historically been followed with a contraction within the year, while household spending fell for the third straight month in June, which hasn’t once happened outside of a slump in the last fifty years. Meanwhile, the S&P 500 Index plummeted 16.8% in the course of 11 days — only twice has that happened since 1970 without indicating a downturn.

According to Jonathan Basile, a senior economist at Credit Suisse (NYSE:CS) in New York, “A lot of the economic indicators are teetering. We’ve gone very quickly from a slowdown scare to a recession scare.” The fact that the Federal Reserve has decided to extend its near-zero interest rates for another two years is proof that they share Basile’s concerns, and are doing whatever they can to stimulate growth.

Jeffrey Frankel is a member of the Business Cycle Dating Committee at the National Bureau of Economic Research, which acts as the official arbiter of when recessions start and end. According to Frankel, “The sum total of the indicators over the last six months” indicates an “increased recession risk over the coming year.” Though predicting economic trends is not an official part of the committee members’ job description, another NBER member, Martin Feldstein, has placed 50/50 odds on there being another recession.

And it’s no wonder, with consumer spending, which accounts for roughly 70% of the U.S. economy, declining in June for the third straight month, which hasn’t once happened outside of a recession since 1959. The Thomson Reuters/University of Michigan household sentiment index fell in July to a level not seen since the last recession.

Growth in the manufacturing sector has also slowed, and the Institute for Supply Management’s factory index fell to 50.9 last month, with anything below 50 signaling a contraction. ISM gauges of new orders and employment both showed contraction over the last two months, which has only happened three times in the last 14 years, with a recession following two of those three times.

The likelihood of a “double-dip” recession has increased from 5% at the end of July to 30% today, a forecast based on stock prices, payroll momentum, jobless claims, housing permits, consumer expectations, and energy costs, all measured by Credit Suisse. According to Julia Coronado, chief economist for BNP Paribas (EPA:BNP) in New York, “The uncertainty in financial markets is becoming self-reinforcing…People are seeking safety, and that’s not a signal of confidence in anything. They’re not ready to go out and hire workers or increase investment or make any kind of decisions that increase growth.”

But one of the biggest signs of trouble is high unemployment. And while the unemployment rate has remained above 9% for many weeks, well above the 4.7% unemployment rate before the recession, that figure has been improving. Initial jobless benefits claims fell below 400,000 last week, and the Labor Department reported Friday that the economy added 117,000 jobs in July, pushing the unemployment rate down from 9.2% to 9.1%. The unemployment rate increased from March through June, so July’s reversal indicates significant advances in that department. If that rate of growth can be sustained, then a recession might be avoidable after all, though if it reverses it would only make another recession more likely.