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An economy is said to be technically in a recession when it experiences two consecutive quarters of negative gross domestic product (GDP) growth.
The biggest portion of the U.S. GDP calculation is consumer spending; then comes investments, government spending, and, finally, net of exports. By far, consumer spending is the biggest factor in calculating GDP. All you need is a slight decline in consumer spending for GDP to fall.
And as it stands, consumer spending in the U.S. economy is on the decline. In 2013, it accounted for nearly 70% of GDP, meaning that for every $1.00 increase in GDP, $0.70 was associated with consumer spending.
Since November, consumer spending for durable goods (goods that can last for a long time, like a T.V. or furniture) declined by 3.23%. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 22, 2014.)
When we look at sales at retailers in the U.S. economy, they keep telling the same story: U.S. consumers are tapped out. Of 175 retailers tracked by FactSet, more than half of them have reported store sales in the fourth quarter of 2013 that were below market expectations. (Source: FactSet, April 11, 2014.)
So far, for the first quarter of 2014, 20 of the major retailers have provided negative guidance regarding their sales and only nine have issued positive guidance. For the entire 2014 year, 31 retailers have issued negative guidance about their sales and only 15 have issued positive guidance. (Source: Ibid.)
There is a clear sign of declining retail sales. In 2011, same-store sales grew by 2.9%; in 2012, they increased by 2.6%; and in 2013, same-store retail sales grew by 1.5%. See the trend? Sales at retail stores grew last year at only half the pace they grew in 2011. The trend of slower sales growth—maybe even negative growth—will continue for 2014.
A recession in the U.S. economy is becoming a very likely scenario. Consumer spending, which is hands down the biggest portion of GDP, is in outright trouble.
If you take out the rally in stock prices that we’ve had since 2009 and look at the cooling housing market, there is not much left of the economy. So, if 2014 is a down year for the stock market, which I’m predicting it will be, the chances of a recession suddenly look very real within the next 12 months or less.
By itself, the U.S. having two consecutive quarters of marginally declining GDP is not a big deal. The problem with it is perception. All we need is for consumers to see the economy going back into a recession and bang, consumer spending will soften even further.
by Michael Lombardi, MBA
