IS THE UNITED STATES ON THE EDGS OF ANOTHER FINANCIAL DOWNTURN?
For those that believe that U.S. stock market indicators are not the true measure of the health of the nation’s economy, a number of recent events have pointed out the fact that while unemployment may have been stabilized, the economy in the U.S. is far from stable and healthy on an overall basis. Those of us that have dealt with the perils and pitfalls of the erratic economy since prior to the 1980 recession where the prime rate of interest rose to over 20% and inflation was rampant recognize that some of the same type of indicators are present today which could foretell severe economic problems for the near future.
Some of the more significant recent developments and factors that give rise to this pessimism are the following:
- Euro-area economic growth unexpectedly slowed in the 3rd quarter, underscoring the vulnerability of the region’s recovery as the European Central Bank examines the need for fresh stimulus. Gross domestic product in the 19-nation organization rose 0.3%, which is down from 0.4% of the previous period. Germany and France’s economies each crew 0.3%, while Italy’s expanded 0.2%. This puts even more pressure on the European Central Bank to deal with the financial and political issues that are pervasive throughout the Euro Zone.
- The Japanese economy deteriorated more severely than expected in the 3rd quarter, extending a downturn into a 2nd consecutive 3-month period and putting the country into technical recession. Worsening business confidence appeared to be behind the decline. Companies reduced investment in the quarter and they drew down on their inventories rather then increase production, which is a sign that they may be bracing for a tougher time ahead. In preliminary estimates, the gross domestic product shrank and an annualized rate of 0.8% which clearly places the Japanese economy into recession territory.
- With the tragic triple bombing in France, French tourism has taken a dramatic downturn. Since tourism can amount to as much as 30% of the French gross domestic product, and is France’s number one industry, especially in the Paris area, the drop in tourism for the near-term and possibly the long-term can have serious and consequential effects on the French economy.
- Although stock markets have been adjusting to the anticipated increase in interest rates by the U.S. Federal Reserve Board at its December meeting, if the rates are raised, not only the cost but also the availability of borrowing will be adversely impaired, creating a blow to small and mid-sized businesses that especially at the end of the holiday season depend on borrowing to meet seasonal borrowing needs. It is currently difficult for such borrowers to obtain loans based upon the increased regulatory requirements, and an increase in interest, will only exacerbate matters.
- Major retailers have predicted a downturn in year-to-year results for holiday season sales, which will severely impact profitability for these retailers during the most critical selling time of the year.
- Oil prices remain at record below levels, creating a downturn in employment, expansion, development and activities in the petroleum related industries. On a weekly basis, multiple bankruptcy proceedings have been filed by businesses involved in the energy portion of the economy as a result of the cost to produce being greater than the price of the sale.
- Most European loans are U.S. dollar denominated, which means that principal and interest have to be paid in dollars and not euros or other local currency. With the strength of the dollar and the weakness in the euro and other currencies, borrowers are being required to pay as much as 25% more for interest and principal reductions in order to acquire the dollars necessary to satisfy the loan document requirements. This is having a significant impact on many European businesses that are being squeezed with this very substantial increase in borrowing.
With today’s global economy no longer allowing the United States or any major economic power to manage its economy in isolation, the adversities in Europe and elsewhere in the world can have a significant potential future impact on the U.S .economy which, according to some experts, is still struggling from the aftermath of the 2008-2010 recession.
Bankruptcy veterans are predicting that if the holiday selling season falls below even lowered expectations, at the beginning of 2016, especially based on what is occurring in Europe and elsewhere in the world, there could be indications of another U.S. financial recession.