3 Signs We're Heading for a Recession

Double Dip RecessionZero. Zilch. Nada. That's the number of jobs created in August 2011.

By itself, it's just a single data point. And while the U.S.'s gloomy employment situation is distressing, that figure alone is no reason to hit the panic button.

Does that mean our economy is on the mend -- or at least that we've hit the bottom and there's nowhere to go but up? Hardly.

In fact, we've got a four-alarm economic fire burning: Take the employment situation, add the state of consumer confidence, and top it off with Wall Street skittishness, and all signs point to trouble ahead.

Who Says We're Heading into Recession, Act II?

Not Ben Bernanke. In his Jackson Hole speech, he said, "I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace." That's a whole lot of nothing, but what else is our Federal Reserve chairman going to say? He can't say we're heading for a recession. We have to look at the data and make up our own minds.

So we turn to the professionals that dissect the economy's every twitch and flutter. Of course, these are the same economists who believed economic growth would pick up during the second half of 2010. Yet growth slowed down.

Then they tweaked the timeline and announced that the first half of 2011 was when things would really start rocking again. Really? The government recently revised its first- and second-quarter annualized growth to 0.4% and 1%, respectively. Those aren't exactly on up-tempo beats.

Now we're told that economic growth will strengthen as we head into 2012. I'm beginning to wonder if economists are looking at the same stats I'm seeing.

The Writing's on the Wall

Despite being one of the best systems in the world, the U.S. economy is not poised for rapid growth anytime soon. In fact, the signs are stronger than ever that we're heading into Recession, Act II. Here are three reasons why.

1. It's the jobs, stupid.
Let's start with the stunningly awful jobs report in August.

Persistent, high unemployment is a big problem. Lakshman Achuthan, managing director of the Economic Cycle Research Institute, summed the situation up perfectly for CNN Money by saying, "When employment drops, incomes fall. When income falls, sales fall. When sales fall, production falls. When production falls, employment falls."

How can unemployment come down if our economy isn't growing? And how can the economy grow if there's no job creation? Case in point, Cisco (CSCO) and Research In Motion (RIMM), in the face of declining profits, announced they will be laying off 6,500 and 2,000 employees, respectively. Until we break this cycle, high unemployment will continue to be a drag on economic growth.

2. Job jitters = pinched pocketbooks
If people can't find jobs or are worried about the ones they have, how can they be confident about spending money? The answer is they can't. Consumer confidence crumbled in August, with the Confidence Board's index falling from 59.2 in July to 44.5 in August.

To put consumer confidence in better perspective, let's look at the domestic same-store sales of Wal-Mart (WMT) and Costco (COST). Same-store sales, excluding gasoline sales, dropped for the ninth consecutive quarter at discount giant Wal-Mart. Contrast that with Costco's same-store sales trend: The warehouse retailer made it seven quarters in a row of positive comps.

Unlike higher-end Costco members, the average Wal-Mart consumer continues to feel the pinch of the lackluster recovery. He or she has plenty of reasons to worry going forward. Those concerns will show up in lower sales in the future.

3. A stressed consumer = a distressed Wall Street
Wall Street is also feeling Main Street's jitters. The S&P 500 has fallen more than 13% since peaking on July 7, 2011, and there is fear in investors' eyes.

Investors continue to pull money out of mutual funds, making a flight to safety. The price of gold is near $1,900 an ounce and 10-year Treasury yields dipped below 2%. Those aren't signs of confident investors.

Companies, flush with cash, are starting to buy back shares. That's not a good thing. It means that they are not investing in physical or human capital because they don't see enough demand on the horizon. Investors want to believe that companies are repurchasing shares because stock prices are attractive. Unfortunately, companies have a history of buying lots of shares at high prices rather than low ones.

Fearful investors are good for those looking to buy stocks in the future, not for those that currently own equities. It's sad but true. Stock prices fall as fear grows. Consumers who feel less wealthy tighten their purse strings, spend less money, and drag the economy down with them.

Someone's Gotta Say It

For me, these three signs point to another recession. The employment situation remains gloomy. Consumer confidence continues to crumble and investors are starting to get scared. Our economy runs on confidence and there's just not enough to keep it from contracting in the near future.

To see how David is investing during these turbulent times, follow him on Twitter at @trendsandtrades. You'll have access to all his research as well as the buys and sells he's making in today's volatile markets.

David Meier is an associate advisor at The Motley Fool. The Motley Fool owns shares of Wal-Mart Stores, Research In Motion, and Costco Wholesale. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Costco Wholesale, and Cisco Systems and creating a diagonal call position in Wal-Mart Stores.


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