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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.

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