Recession?
Are we headed into a recession in 2016-2017?
The decline in the key drivers of economic growth say yes:
- Employee layoffs. “U.S.-based companies announced 65,141 job cuts last month (April), up 35 percent from March.” Boeing plans to layoff 8,000 employees – 10% of its workforce. Intel plans job cuts of 12,000 – 11% of its total headcount.
- In 1980 there were 60 USA non-financial corporations rated AAA. Today there are just 2 with the recent surprise that ExxonMobil was downgraded to AA+. This will reduce capital investment and ultimately employment and GDP growth.
Business investment and employment are critical factors in economic growth.
As a result of these negatives:
- The Labor Force Participation rate dropped to 62.8% in April 2016. A 38 year low. Thus 94 million people are out of work. This is a decline over the recent several years from 66%-67%. New job creation is weak and will not improve the participation rate.
- GDP growth is in decline. It registered an anemic 0.5% increase (revised to 0.8% May 2016) in the first quarter of 2016. In the third and fourth quarters of 2015 it was 2.0% and 1.4% respectively.
China’s struggles are a concern. Its growth has consistently slowed. 2015 was its slowest year in 25 years. This is a factor in the global decline in the demand for commodities and the 55% reduction in commodity prices since 2014 negatively affecting capital investment and employment. Unfortunately 2016 growth is difficult to accept as real as it has been stimulated by debt in an economy that is seriously overleveraged.
The USA’s growth prospects are muddled by an apparent decision by one of its major industries – automobiles. General Motors, Ford and Chrysler are reportedly not investing in flexible production systems as are its German and Japanese competitors. This is described as: “…technological change that stands to radically reshape the car business.”
Will this result in the Big Three’s costs being higher than its competitors? Probably. It will most likely lead to lower unit sales and lower overhead absorption resulting in lower operating profits, lower cash flows, less capital investment and lower employment.
Adding to the puzzle about General Motors’ viability is its $500 million investment in Lyft – a Uber competitor. Lyft is a business outside of GM’s vehicle manufacturing core. Is GM losing disciplined strategic focus?
Follow-up articles:
Business Insider, May 26, 2016, “Japan’s prime minister is warning world leaders about a ‘Lehman-scale crisis’” He interprets economic data as pointing to the reemergence of the global financial crisis of 2007-2008.
Fox Business, May 26, 2016: Interview with former Federal Reserve Chairman Alan Greenspan: “Greenspan: Western World Headed for a State of Disaster”. “…have a very profound long-term problem of economic growth…(not) on the verge of a market…collapse…”
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