First Sign of a U.S. Recession?

April 11, 2016

Written and Edited by HV

The forecast for real GDP growth in Q1 has plummeted from 2.5% to 0.1% in eight weeks, urging the Fed to call an emergency meeting.

The numbers came from the GDPNow system of Atlanta Fed, which is known to be accurate.

gdp now

The culprits behind this drop are plenty. Despite a relatively stable income growth, the strength in consumer spending is dropping. Capital Economics, a London-based economic research consultancy, estimates Q1 real consumption growth in the U.S. will be 2.0%, down from 2.4% in the fourth quarter and 3% in the third quarter of 2015.

Falling labor productivity and rising labor costs play a part in dragging down the GDP growth. Add low energy and commodity prices and currency volatility, and we’re looking at the tipping point between an economic recovery and a potential recession.

If the GDP prediction from Atlanta Fed was the only lead, it could be written off as “inaccurate prediction.” Unfortunately, Wall Street predicts similar fate for America’s biggest banks.

Analysts say the first quarter of 2016 “has been the worst start to the year since the financial crisis in 2007-2008,” and forecast a 20% decline in earnings from the six biggest U.S. banks, which is a bad sign. The first three months of the year are the most profitable period of banks, generating at least a third of their annual revenue.

Fed Chairwoman Janet Yellen had a panel in New York  with three other former Fed chairmen last week where she discussed the economy’s prospects. “This is an economy on a solid course, not a bubble economy,” she said.

Now it looks like the Fed and the economy are on a collision course.