Why We Are Closer to a Recession in 2014 Than You Think

Don’t buy into the notion that there’s economic growth in America!

We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)

As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.

Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)

And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.

The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.

But since 2014 began, and the Federal Reserve actually started to taper, the yield on the long-term 30-year U.S. bond has declined more than 12%.

 If the Fed is pulling back on printing (it has said it wants to be out of the money printing business by the end of this year), why are bond yields declining?

From a fundamental point of view, it suggests the market anticipates very slow growth for the U.S. economy ahead.

Dear reader, the perfect storm has been created for investors. There’s way too much optimism in the marketplace right now. Irrationality prevails. The Dow Jones Industrial Average has marched close to 17,000 on a poor economic recovery, worsening corporate earnings growth, and a record amount of money investors have borrowed to buy stocks. Could the set-up for a fall be any better?

Be very careful. Many signs are pointing towards a recession in the U.S. economy. When this stock market bubble bursts, you don’t want to be anywhere near it.