Jack Rasmus

COMMENTARY: Today, June 1, the US and stock markets across the world experienced major declines. Further significant corrections are almost sure to follow. The causes were the increasingly obvious fact that the US economy is once again about to slow significantly, and has already begun to do so.  On wednesday, a preliminary jobs report by ADP showed virtually no creation in May, contrary to expectations of another 200,000. In addition, manufacturing indexes in the US have plummeted by huge amounts, both for current and new orders. Housing prices are again in free fall and housing lingers in depression like conditions. Meanwhile, China, India, and Brazil are sharply cutting back their economies, while Japan, UK, and Australia are all entering deeper recessions, and the Euro debt crisis deteriorates with no solution in sight. These are all events this writer has been predicting for months, and forecast as far back as late 2009 when his book, EPIC RECESSION, was written and sent to publishers. The US economy is closely tracking a previous Epic Recession of 1907-1914.

‘THE COMING DOUBLE DIP RECESSION, by Jack Rasmus, copyright June 2011

“Today, June 1, stock markets in New York and around the world declined in levels not seen since last summer 2010. Days and weeks immediately ahead will likely register even further significant market declines, as the obvious becomes increasingly evident: the U.S. and other major global economies are once again on the cusp of a significant slowdown.

In a recent post a few weeks ago, entitled Why March-Aprils Job Gains Will Collapse This Summer, this writer warned that the official hype about job recovery promoted by the business press, and distorted US government data, was grossly inaccurate. Behind the false jobs data lay a growing picture of imminent economic relapse. The U.S. Labor Departments jobs numbers due this Friday, June 3, will likely further corroborate this view.

But the coming economic slowdown is not simply a result of the failure to create a sustained recovery of jobs in the U.S. for the past two years of so-called economic recovery. Nearly all economic indicators have been deteriorating since the beginning of 2011, even though policy makers and Wall St. investors have been diligently ignoring the fact.

Consumption growth, which represents 70% of the U.S. economy, early in 2011 fell by half compared to the previous period in 2010, from 4% to 2.2%. Real spending, adjusted for inflation, has been mostly flat so far in 2011. Rising gas prices have accounted for 60% of consumption gains in 2011. Escalating prices for food, health care, local taxes, and education costs have taken a further toll. The wealthiest 10% of consumer households now account for 60% of spending, buoyed by the past year of stock market gains that are now about to be reversed. High end retail stores, like Tiffany’s, rake in record sales while low end retailers like Wal-Mart struggle for sales. Apart from the wealthiest households, there has thus been no real sustained recovery of consumer spending in the US economy for the past two years. Retail sales have fallen the last three months in a row. And the lack of job growth, falling home values, rising core inflation (food & energy), and declining real incomes for the 95 million households earning less than $100,000 a year means a flat at best scenario for consumer spending for 2011.

Housing, which accounts for another 10% of the US economy, is in a deep depression, a condition comparable only to the 1930s. So no help here. Housing starts, sales, building permits are off by 75% from 2007 highs. After having dropped by 25% in the first phase of the recession, then briefly leveling off, home prices are in decline once again. Another 15% drop is predicted. There’s never been a sustained recovery from any of the ten post-1945 U.S. recessions without a housing recovery; and the latter is clearly more unlikely than ever today, given the nearly 10 million foreclosures and 16 million–i.e. more than a third of home in negative equity.

What little economic growth has occurred since June 2009 has been the result of inventory buildup by business, moderate spending on tech equipment, and a brief surge of manufacturing, with much of the latter driven by export sales. But manufacturing represents only 10% of the US economy and cannot by itself lead the economy onto a sustained growth path. Moreover, it too has begun to slow and decline in the past two months as the global sources of demand for US exports begin themselves to decline. The U.S. index measuring manufacturing activity in May fell a full 7 points and new orders by almost 11 points–one of the largest declines in recent years and back to the low point of June 2009. Global sources for US exports are drying up as well. China, India, and Brazil have all taken action to dramatically slow their economies growth rates down by at least half. Meanwhile, Japan, Australia, the United Kingdom have all re-entered a recession, while the periphery economies of the Eurozone continue in an ever-deepening economic contraction.

The so-called economic recovery that has been underway since the official end of the recession in June 2009 has been the weakest and most lopsided recovery from recession in the post-1945 period. The best quarters of economic growth, which occurred in the second half of 2009, were merely half that typical of recoveries from recessions. In all normal recessions before 2007, growth averaged 8%-9% in the quarters immediately following the official end of the preceding recession; following the June 2009 low point of the current recession, however, U.S. economic growth was barely half that averaging only 4%-5%. In 2010 it further trended down. And in the first quarter of the current year, 2011, it was only 1.8%. For the second quarter of 2011 it will almost certainly fall below 1.8%.

The recovery from the June 2009 recession trough actually lasted only 12 months. The U.S. economy suffered a relapse by the summer 2010. Unemployment started rising in June 2010 and continued for the next three months and home foreclosures hit record highs by August 2010. Nearly all other indicators recovered, at best, only half of their previous losses by late last summer.

This led to the Federal Reserve Bank of the U.S. policy of pumping another $600 billion into the economy last fall in the form of direct bond purchases from the public, a policy called Quantitative Easing 2, or QE2. That effort is now over and comes to an end this month, June 2011, however. The Fed policy succeeded in giving a final, last boost to the stock market, which is now dramatically coming to an end. It also succeeded in lowering the value of the US dollar and thus in temporarily stimulating export sales. But QE2 failed to lower mortgage rates much and resurrect the housing markets. And it totally failed to get banks to lend to small businesses and create jobs. Bank lending has fallen nearly every month since June 2009. Meanwhile, large businesses sit on their $2 trillion cash hoard and refuse to spend in the US to create jobs.

What the US economy is about to experience this coming summer 2011 is therefore a return of the economic relapse that began a year ago, in summer 2010, but that was temporarily checked by government and Fed policies late last year. However, now that the Fed is in retreat once again, now that states and cities are beginning to cut spending and raise taxes in earnest, and now that the Teaparty Congress and the Obama administration are about to dramatically cut federal spending as well–the combined effect will almost certainly result in another major economic relapse of the US economy in the months ahead.

For a further, more in depth analysis of the Coming Double Dip Recession, the reader is encouraged to read the writers forthcoming article in the July-August issue of Z magazine; or his predictions of an inevitable double dip in his recent book, Epic Recession: Prelude to Global Depression.

Jack Rasmus
June 1, 2011