The Real Recession

The hate toward Republican presidential frontrunner Donald Trump is really hitting a high point. Most recently, Trump said the U.S. is headed for a “massive recession.” He says there’s a real estate bubble, a stock market bubble, and that the reason he is getting so many supporters is the fact that Americans are angry at the state of the U.S. economy. He said real unemployment is over 20%…

Economists came out of the woodwork to say that the U.S. is not in a recession, nor is it headed toward a “massive” one. They cited unemployment statistics, they pointed to GDP growth, but ultimately, they are missing the point…

Whether you support Donald Trump, whether you believe he can make America great again or not, is really beside the point. What we should be focused on is why his message resonates so strongly with so many Americans. Why are people so disappointed and angry about the U.S. economy? 

I know, it seems pretty obvious why people are angry. The U.S. economy has been growing at a disappointing 2% a year for the last few years. And if you look at the bigger picture, Americans aren’t making more money.

Median income for American households is 0.3% lower than it was in 2000, according to Sentier Research. That means the typical family earns less than it did 16 years ago. That’s just not how it’s supposed to work. And it makes things worse when you can clearly see the rich getting richer…

In 2014, there were 27 new billionaires in the U.S. In total, there are 535 American billionaires. And after adding 90 billionaires in the last year, China has even more, with 568.

Now, I don’t think for a minute that anyone just automatically thinks they should be a billionaire, too. No, this is really a question of opportunity…

You know the drill here. Go to a Wal-Mart and check the labels. Made in China, made in China. The perception is that America has lost jobs to China and other countries.

Manufacturing employment has long been one of the highest-paying blue-collar jobs. But since 2007, manufacturing jobs have dropped in 44 U.S. states. Among the states suffering the most with job losses and stagnant incomes are New Mexico, Nevada, Florida, Alabama, and Michigan.

So when voters see that China is adding billionaires faster than the U.S., well, it looks pretty clear what’s been happening. Chinese are getting rich on our jobs.

Yeah, no wonder people are angry.

Two U.S. Economies

Of course, parts of the U.S. are doing just fine. Incomes and employment are growing nicely in tech hubs such as Silicon Valley, Denver, Austin, and Boston, and coastal cities such as New York, Miami, San Francisco, Portland, and Seattle. Oil economies like Dallas and Houston, and North and South Dakota have been above average.

And it seems as though the disparity of growth makes the anger worse. I’m sure it’s tempting to blame the loss of manufacturing jobs on the increase in income disparity. But the fact is, the average manufacturing wage is around $20 an hour. That’s less than the average wage for the U.S. as a whole.

No, the days when manufacturing could really support the U.S. middle class are long gone, and it’s not because jobs have been shipped overseas.

The simple truth is that manufacturing is a low-margin business. So to maintain profitability, manufacturers will keep labor costs in line. That’s how business works.

And of course, Donald Trump knows this. All the trade renegotiations in the world won’t change this fact. Trump is simply tapping into voters’ anger to gain support.

The Real U.S. Recession

The scary part is that, despite economists’ attempts to make us all feel better about the economy, there is a recession brewing. It’s an earnings recession. When companies start reporting first-quarter earnings in a couple weeks, we will see that earnings have fallen for four straight quarters.

That’s a bad sign. Because when earnings start to decline, the negative feedback cycle of economic recession begins. Companies start to lay people off, incomes and spending fall, and corporate profits get worse…

Part of the reason for the earnings recession is that earnings from the energy and materials sector are really bad…

You should also note on this chart that health care earnings are leading the pack. That’s not actually good, as it means Americans simply have less money to spend.

Another alarming trend is the amount of company write-offs. Companies are writing off losses at a pretty good clip right now. But these write-offs are not really being reported. Instead, companies are reporting “adjusted earnings,” which exclude these write-offs…

And as you can see, when companies start writing stuff off, it often coincides with an actual earnings recession.

Now, does all this mean the U.S. is actually headed for a recession? Not exactly. But we sure can’t ignore the possibility. Especially if oil and other commodity prices don’t recover. There are a lot of emerging economies that depend on oil and commodities, and they are being squeezed. Default risks are rising for countries like Venezuela and Brazil and maybe even China.

Now, here’s the thing: Analysts think earnings will improve dramatically in the second half of this year. While that seems unlikely now, keep an eye out for revisions when first-quarter earnings season starts. Trump might be right about a looming U.S. recession after all…

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.