The only thing standing between the United States and recession is the American consumer.
There is no recession in America because of strong consumer spending, economists told Bloomberg Business. Unfortunately, other segments of the U.S. economy are so weak that any drop in consumer spending could trigger a recession.
Falling commodities prices and a strong U.S. dollar are slowing the industrial sector and creating regional downturns, Bloomberg reported, although increased consumer spending and job gains have offset losses in other areas of the economy so far.
Four U.S. states—Alaska, North Dakota, West Virginia and Wyoming—are already in recession because of the collapse in energy prices, Moody’s Analytics reported. This may not have much effect on the national economy, because those states are low population and geographically remote. Three more states—New Mexico, Louisiana and Oklahoma—could face recession in the near future.
The regional downturns did not impact the national economy because they were offset by strong job growth in California, Texas and Florida. Those states’ economies added around 800,000 jobs in 2015, while only 37,000 positions were lost in North Dakota, Wyoming and West Virginia. That means the United States’ economy is capable of absorbing the losses caused by the collapse in commodities prices.
U.S. Economy Is Still Expanding
Overall consumer spending in the United States is increasing; retail sales in January 2016 were 3.5% higher than in January 2015. This indicates that the U.S. economy is expanding but that expansion seems to be concentrated in certain areas, such as online retail. Unfortunately, some other areas of the economy, such as brick-and-mortar retail, are contracting.
Amazon’s (NASDAQ: AMZN) revenue grew by $18.02 billion (€16.35 billion) in 2015, rising from $88.99 billion (€80.74 billion) in December 2014 to $107.01 billion (€97.09 billion) a year later. During the same year Walmart’s (NYSE: WMT) revenue fell by $3.52 billion (€3.19 billion), dropping from $485.65 billion (€440.62 billion) in January 2015 to $482.13 billion (€437.43 billion) a year later.
This means that some of the changes in technology and consumer spending in the United States could make a possible recession far worse. It could also indicate that instead of expanding, income is simply shifting from one sector of the economy to another.
Crisis on the Farm
One area of the U.S. economy that is already in a serious downturn is agriculture. Sadly, the extent of that decline looks more like a depression than a recession.
The income of the average farm family in the United States fell to $17,279 (€15,676) a year in 2015, well below the federal poverty line of $24,300 (€22,047) for a family of four, the U.S. Department of Agriculture reported. As recently as 2013 the average farm household income was $28,687 (€26,027) a year in the USA.
The decline in farm income is being driven by a serious collapse in commodity prices. As recently as 2012 farmers made $123.3 billion (€111.87 billion) selling their crops; the USDA predicts that number will drop to $54.8 billion (€49.72 billion) in 2016. This means U.S. farmers have seen more than half of their income vanish in three years.
The effect on the overall economy might not be that great because the amount of farm income is actually smaller than the revenues of many large U.S. corporations. For example, all the farm income in the United States equals around half the revenues of either Amazon at $107.01 billion (€97.09 billion) in fourth quarter 2015, or America’s largest grocer, Kroger (NYSE: KR), which reported revenues of $108.87 billion (€98.78 billion) in third quarter 2015.
Unfortunately, falling farm revenues will have a devastating effect in states heavily exposed to agriculture, such as Iowa and Kansas. Since these heartland states have not shared in the recent U.S. economy, it could make America’s well-publicized problems with income inequality worse. To make matters worse, some of the states that are most dependent on agriculture are also heavily dependent upon energy, including North Dakota.
One in Five Chance of U.S. Recession
It looks as if the U.S. economy is strong enough to offset the losses from the spreading economic downturn in America’s heartland. Therefore, as long as consumer spending remains strong, the U.S. should avoid a serious recession.
Instead, it would take an outside shock such as an even greater downturn in China or a steep increase in interest rates to send the entire U.S. economy into recession, although the likelihood of that happening is greater than you might think.
Economists interviewed by Bloomberg Business put the median probability of a general U.S. recession in 2016 at 20%, or one in five. That means recession is not likely, but it is far more probable than commonly thought.
Therefore, executives and investors need to take the possibility of a U.S. recession seriously and plan for one. The American economy is expanding, but it could be weaker than many people believe.
