This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

9 Forces That Could Bring On a Recession

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- There are two views on the softening economic data that began in April and continues unabated. The majority view is that the U.S. (and world) is in a "soft patch," similar to the one that occurred last summer. The disasters in Japan have caused supply-chain disruptions, blamed, along with $4-per-gallon gasoline, for the economic slowdown. The view is, now that the supply disruptions are ending and gasoline prices are on the decline, consumption will expand, thus ending the soft patch.

The minority view, and the one that I espouse, sees howling headwinds that threaten to turn the soft patch into outright recession. What follows is a discussion of those headwinds.

1. Employment is one of the two biggest issues facing the U.S. today even if one believes that the 9.1% unemployment number is accurate. The headline Establishment Survey data is beset with issues from unstable seasonal factors to significant upward bias from an arcane birth-death business-formation model that automatically adds approximately 50,000 jobs per month, as the Bureau of Labor Statistics believes there are significantly more small businesses being created than are being closed. Apparently, these folks haven't left the Washington, D.C. area for the last couple of years. (See the work of John Williams at Shadow Government Statistics.)

It is more likely that the U6 unemployment rate (15.8%) is closer to reality. The recent fall we have seen in the "official" rate from 9.8% in November to 9.1% in May appears to be more due to a falloff in layoffs than a rise in hiring. Over-taxation and over-regulation are often cited as reasons businesses won't hire, and I suspect this is partly true. But, it appears that lack of demand and credit availability are the bigger culprits. Data show that real wages have been flat-to-down since 1997, and that the expansion of 2002 to 2008 was based on debt alone, a condition that won't occur again anytime soon.

2. The other big issue in America today is mortgages. More than 28% of them are underwater in the U.S. On top of that, in 2006 at the height of the housing insanity, financial institutions were issuing 100%-plus loans with negative amortizations for the first five years at variable interest rates. Today, five years later, many such loans must begin full amortization, more than doubling the mortgage payments. The vast majority of these will default. Thus, we have at least 18 more months of significant foreclosure activity, falling home prices, and, as a result, continued low levels of new construction activity, which used to be a significant economic driver. The continued downward pressure on home prices will weigh heavily on consumer sentiment, consumer balance sheets, and consumption levels.

1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $123.54 -0.57%
GOOG $549.79 -0.97%
FB $83.31 0.36%
YHOO $45.11 1.40%
TSLA $184.05 -3.30%


DOW 17,691.31 +13.08 0.07%
S&P 500 2,058.27 +2.12 0.10%
NASDAQ 4,877.8750 +14.5130 0.30%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs