Recession on the horizon

by Martin Hart-Landsberg

According to Bloomberg News, analysts at a number of major financial institutions see “mounting evidence” that a recession is not too far away.

In a way, their assessment is not surprising. The current expansion, which started in June 2009, is now 99 months long, making it the third longest expansion in U.S. history. Only the expansions from March 1991 to March 2001 (120 months) and February 1961 to December 1969 (106 months) are longer. It is likely that this expansion will pass the 1960s expansion in length but fall short of the record.

Warning signs

The financial analysts cited by Bloomberg News did not base their warnings simply on longevity. Rather it was the behavior of corporate profits, more specifically their downward trend, that concerned them. Historically, expansions have come to an end because declining profits cause corporations to slash investment spending, which leads to a decline in employment and eventually consumption, and finally recession.

As the Bloomberg article explains, “The gross value-added of non-financial companies after inflation — a measure of the value of goods after adjusting for the costs of production — is now negative on a year-on-year basis.” As an analyst for Oxford Economics Ltd. concludes, “The cycle of real corporate profits has turned enough to be a potential source of concern in the next four quarters.”

U.S. real corporate surpluses. Oxford Economics / Haver Analytics.

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