Albert Edwards: The US economy is already in recession

The US consumer has been the engine of the country’s economic recovery since the financial crisis and has managed to keep the country from falling into a recession this year but for how much longer will this continue to be the case? That’s the question from perma-bear Albert Edwards asks in his weekly Global Strategy update.

Albert Edwards – A recession round the corner?

The Society Generale analyst is once again banging the US recession drum. Edwards believes that it is only a matter of time before the US consumer stops spending, putting the brakes on the country’s economic recovery. For the past two quarters consumption spending has helped keep GDP growth robust without this spending, the US would have entered a recession at the end of 2015. Indeed, if you manipulate the figures to remove consumer spending growth from GDP figures, for the second quarter consumer spending adjusted GDP contracted by more than 2%.

Edwards: The US economy is already in recession
Edwards: The US economy is already in recession

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Still, inventory growth remains robust. In real terms, inventory growth is still rising at 2% year-on-year which is around the average since the recovery began. Edwards points out that recessions usually take hold when companies are forced to liquidate inventories. It’s clear they’re not being forced down this route just yet. That being said, inventory/sales ratios are still consistent with the high levels seen in previous recessions, which is the reason why companies are being forced to cut inventory investment. To put it another way, companies are not being forced to liquidate inventories just yet, but they are pulling back on inventory spending as they struggle to sell-down high levels of inventory.

Excessive inventory/sales ratios are not the only thing forcing US companies to cut inventory investment. The current profits recession is acting as a leading indicator for both business fixed investment (machinery, buildings etc.) and inventory accumulation. Falling profits are forcing companies to pull back on spending and the knock one effect of this will be a recession. As Edwards explains:

“Our hypothesis that a US profits recession will lead to a collapse in business investment and take the economy into recession seems to be playing out. If consumption stalls then we really are in trouble, for the next devastating phase of the secular valuation bear market in equities will kick in much to the shock of both investors and the Fed.”

What will it take for consumption growth to stall? Inflation:

“Headline CPI inflation is set to rise rapidly from the 1% where it has hovered for the past six months and to converge with core CPI, standing at 2¼%. That will sap some 1¼% from real personal disposable income growth, which will decelerate rapidly, removing the key prop for recent moderate robust consumption growth. This is the economy’s crutch being kicked away.”