A recession’s coming.
Next month, next year, one day. The question is only when — trees don’t grow to the sky and economic expansions don’t last forever.
Federal Reserve chairman Janet Yellen told Congress this month: “Financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar.”
That, along with the Fed’s decision to pause on its long-anticipated plan to raise interest rates, signal just how on edge the American economy is despite traditional signs of strength, such as unemployment of just 4.9 percent.
Experts are relatively sure that the U.S. is safe, for this year. But they aren’t absolutely certain nor are they making any promises about 2017 since the dangers are growing. Fiscal threats easily whip around the world and gum up the U.S. economic machine, which is already burdened by the collapse in commodity prices and nervous consumers.
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“Right now, the most likely scenario is we’re going to continue in this phase of midgear growth overall in retail with a very soft price environment,” said Doug Hermanson, principal economist at Kantar Retail. “To me, the recession would have to come from China stumbling and that creating a domino effect that falls into Europe, which is a much bigger [market] to the multinational firms that make up the stock market.”
Europe presents an uncertainty of its own. After years of fretting over whether the relatively small Greece might leave the European Union, the U.K. struck a deal with its neighbors just Friday that might lead to a referendum on whether the world’s fifth-largest economy stays in the bloc.
That’s just another question mark for Wall Street. Already investors have been rattled by the rise of untraditional presidential candidates Donald Trump and Bernie Sanders, repeated warning flags out of China and a collapse in the global oil market that’s put crude under $30 a barrel.
Fueling up at the pump might be considerably cheaper, but that’s more than offset by all the uncertainty in the world.
The 100 companies in the WWD Global Stock Tracker have been on a roller-coaster ride that’s left them at about flat for the year so far. But the Dow Jones Industrial Average is down about 6 percent, widening the cracks at the top of the consumer pyramid — and they’re beginning to penetrate farther down.
“There are vulnerabilities, especially in luxury spending in 2016,” Hermanson said. “Those are the areas that are going to pull back first, those highly discretionary, big-ticket items.”
It’s not just the well-heeled. People are simply not spending like they were. A recent survey by the National Retail Federation showed that 49.2 percent of people who anticipate a tax refund this year are planning to “save the money rather than spending it right away.”
Retail sales have generally been blah — or worse. Wal-Mart Stores Inc. last week warned that sales would be flat this year after falling 0.7 percent last fiscal year. Nordstrom the same day said net profits dropped 29.4 percent in the fourth quarter, the second bad quarter for the retailer in a row.
“There is decent-to-strong growth overall, but a lot of that spending power is going into other places,” said Frank Badillo, director of research at Macro Savvy. “It’s going into buying cars. It’s going into eating out. And it’s going into primarily other services…health care is taking a little more out of people’s pockets.”
Even though the U.S. is not currently in a recession, Badillo said, “If you look at retail, there are sectors that are performing at levels that it’s not surprising people might think we’re in a recession.”
Don’t expect that feeling to go away.
“What is probably certain is that there will be another crisis,” said Bernard Arnault, chairman and chief executive officer of LVMH Moët Hennessy Louis Vuitton, at a recent news conference. “You have to be optimistic in the long term and pessimistic in the short term. That allows you to prepare for the worst.”
Flashing a grin, Arnault appeared undaunted: “We do best when the economic outlook is more difficult. It’s quite surprising.”
That might be true for LVMH and Arnault, but it’s certainly not the case for everyone.