A Recession in 2006? 07? 08? By William Cate

The tea leaves aren't encouraging for American prosperity in the next few years.

The Composite Index of Leading Economic Indicators registered a 0.2 increase in July 2005. The index was unchanged in May. The July results were in line with economic analysts' pessimistic projections for next year.

The U.S. Dept of Labor shows that the 2005 annual Consumer Price Index (CPI) average through June to be 4.5%. This means the annual inflation rate will be at least 9.0%. The culprit is the $67/barrel oil price, which is very likely to move over $70/barrel in the fall as the demand for winter heating oil increases. If so, the CPI will move up above 5% and we will be back to double-digit inflation.

The Real Rate of Inflation

For anyone who may not understand the businessperson's policy of doubling or, if you are a hard currency advocate, tripling the CPI to get the inflation rate, here's the reason. Government policy is to under-report bad economic news that influences public economic perceptions and voter choices. In addition to the need to manipulate perceptions, the Government ties assorted increased Government payments, like Social Security, to the CPI. The Labor Department's mandate is always to fudge the figures to get the lowest possible percentage. Since 1992, the CPI has been at or below 3%. This is the first year of really bad inflation news. It won't be the last.

Manufacturing Jobs Down

Manufacturing jobs have dropped to 11.3% of the workforce, down from 17.3% in 1995. America has been losing manufacturing jobs overseas since the 1970s. The Government's argument that we have evolved into being a service job society is nonsense to anyone who lives in communities that use to host these manufacturing firms.

The Real Estate Boom

For a decade, we've had a Real Estate Boom. As a result, the number of employed directly or indirectly in the real estate and construction industry has risen. The Real Estate Industry is the only star performer in the private sector of our economy. However, the pundits for months have been predicting the Real Estate Bubble is about to burst. The signs of a real estate contraction are becoming clear in the San Francisco Bay Area, where I live. The result of a Real Estate Bubble Burst would be a loss of jobs in real estate and related industries as well as a major increase in the number of middle class homeowners filing bankruptcy. Both events would create a recession, because money for new goods and services would quickly dry up.

More Government

The other growth industry is Government employment. About 16.3% of the employed work for local, state or federal government agencies. Government workers produce nothing. Often bureaucrats are part of the problem when it comes to creating private sector jobs. However, if you work for the Government, your job is relatively safe.

Growth

The McJobs industry sector has grown by about 10% in the past decade and retail jobs represent about 16.1% of the workforce. Few salespersons make enough money to have a disposable income that will create jobs in other sectors of the economy.

The Bush Negative Budget

George Bush has the dubious distinction of presiding over the largest negative budget swing in American history: from a surplus of USD236 billion in 2000, the year he was elected, to a deficit of USD412 billion, or 3.6% of GDP, when he was reelected in 2004. Even in an economy with output of around US$12 trillion, US$648 billion is a lot of money to owe. Particularly since the Government relies on the private sector to supply the tax money for the Government debt. We owe $7,908,219,158,978.00 as of August 18, 2005. This means each American owes $26,646.80. Since September 30, 2004, the National Debt has increased by $1,640,000,000.00, and the huge interest payments growing to match that debt. As former U.S. Senator Everett Dirksen (1896-1969) once said, "A billion here, a billion there, pretty soon it adds up to real money."

Debts and Credit

Debts don't hurt the borrower until the lender questions the credit worthiness of the borrower. Should the world decide the U.S. is no longer credit worthy, U.S. dollar interest rates will soar. Meanwhile, the Government can monetize the debt by directly or indirectly increasing the currency in circulation, which will add to future inflation. Or, the Government can borrow so much money that funds for business development and expansion becomes far harder to find and the economy stalls. In truth, massive debt puts the Government between a rock and a hard place. In the long haul, the U.S. Deficit will kill the American economy. It's just a question of when and how the end will come.

After the last Recession, consumers' failed to note that the Government allowed banks to change the credit card rules. Under the present rules, your credit cards are due and payable in full, if the bank wants the money now. During a Recession, banks are unlikely to offer new credit cards with no interest charges for a year. So, while you may be able to manage your credit card debt, if the banks question it, and long before you default on your first monthly payment, you may find the bank wanting all their money now. If the real estate market is in retreat, many consumers will not have the means to pay off the banks' requests for payment now.

Companies In Big Trouble

The business sector is in trouble. For instance, Delta Airlines is near bankruptcy. They are only the tip of the airline iceberg. Only recently have the airlines resumed handling the number of passengers they had before 9/11. Now the airlines are caught in a squeeze between fast rising jet fuel prices and the reality that hiking airfares is likely to reduce sales and send more airlines into bankruptcy.

Even a mild downturn of the economy will drive thousands, and possibly tens of thousands, of small businesses into bankruptcy. Excessive consumer debt will force many families to follow the business community's example. I suspect that the new Federal Bankruptcy Act that takes affect in October 2005 will prove to be a major source of voter dissatisfaction in November 2006. The Act protects the banks at the expense of the voters. That's not a good formula to ensure anyone's reelection.

Wars and Avoiding Recession

Currently, anyone could turn the litany of bad economic news into a book. This doesn't mean that a Recession is certain. Wars tend to delay recessions and depression and there are always those pesky Iranians and North Koreans. Any effort to deal with the compounding of the global environmental disaster that awaits the next generation would sustain the economy. The Government spending would create hundreds of thousands of new jobs and allow the Government to spend hundreds of trillions of dollars. In essence, increased Government spending would keep the economy limping along for a few more years. However, it would increase the odds of the Mother of All Depressions to arrive before its time.

Your Survival Strategy

If you agree with me that a 2006 Recession is likely, you can do something to survive it. Your short-term solution is to reduce your debt, unless you are certain that you can pay off your creditors quickly during a Recession. If you are in business, ensure that your customers owe the bank and not you for your goods and services. Offer advance sale packages of your goods or services to Customers before the Recession takes hold. Plan your business and your life around the premise that 2006-2007 may be economically difficult years for you, your family and your business. It's always wise to expect the worse and hope for the best in life.

The long-term solution for both business and the middle class is simple; Globalize to Survive. If you fail to follow this advice you will put your family’s future in harm’s way. Crunch the numbers and globalization is the only logical solution.

There is no certainty that there will be a recession. You may not be able to find a strategy that allows you to survive it without economic damage. However, planning is your best defense. At least you won't be as surprised as most Americans will be when things take a downturn.