I have lived through several recessions throughout my lifetime, but the current economic situation – recession or not – seems quite unique to me. I – and apparently more than a few economists – don’t really know if we are in a recession or not. Investopedia.com defines a recession as “A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade.” The technical indicator of a recession is two consecutive quarters of negative growth – gross domestic product. But the National Bureau of Economic Research sometimes says we’re in a recession without that two-quarter trigger. Co-Founder and Chief Operations Officer Lakshman Achuthan of the Economic Cycle Research Institute insists the U.S. economy is mired in the midst of a mild recession that began in the middle of 2012. He says that when current and previous economic statistics are revised – as they always are – they will show that we have been in a recession for a while now. But Scott Grannis, former Chief Economist at Western Asset Management Company, says otherwise. He notes that weekly claims for unemployment continue their downward trend, and announced corporate layoffs remain low. Grannis says these two indicators strongly suggest that the economy continues to avoid another recession. OK, at some point the semantics start to not really matter. Recession or not, I think we all can agree the economy is not doing all that great. Growth is really slow and unemployment is stubbornly high. Eventualities like that are pretty common during or following a recession, so that’s not unique. But what is unique is what’s happening in the stock market. Record high stock prices and soaring corporate profits seem to be flying in the face of reality with regard to the rest of the economy. Normally, during troubled economic times, the whole economy tends to rise and fall together. As the economy slows and falls into recession, stock prices fall as well. Later, when the economy recovers, stock prices rise, but so do the jobs numbers, consumer confidence numbers, gross domestic product and most other economic indicators. This time, not so much. So I asked myself, “Why?” Why is it that the stock market and corporate profits are through the roof while the rest of the economy is mired in mediocrity? Well, I’ll tell you why. (Now, remember, I am not an economist, even though I play one in the newspaper. And I did not sleep at a Holiday Inn Express last night.) So I could be all wrong. But here’s my theory anyway. I think there is a huge amount of pent-up capital in this country right now. I think corporations are hoarding cash. Normally, as an economy works its way out of a recession, corporations recapitalize, reinvest and start hiring more workers. They want to expand and make more money. This time around, I think corporations have figured out ways to do more with less. They are able to turn a profit with fewer employees and fewer expenses. But instead of reinvesting those profits, expanding and rehiring, they’re playing a wait-and-see game. Those higher profits look great to investors as they swarm to the stock market. Interest rates are so low, the market is really the only place for investors to make money. You’re not going to make any money in municipal bonds, money markets or CDs these days. But why would a corporation hold back from reinvesting, recapitalizing and hiring more people? Isn’t that how corporations grow and make even more money? It is indeed, but I believe there is such a high level of uncertainty in the economy right now, the corporate world is running scared. They’re afraid of what the future holds under the current administration. The huge debt being amassed by the federal government and the Fed’s willingness to continue to print dollars – devaluing the dollars already in existence – is very unsettling to people who run businesses. There is no end in sight to the partisan budget divide in Washington. The White House and Congress seem content to hobble along from one fiscal crisis to the next without ever addressing the obvious and ominous systemic problems in the U.S. budget. Amid that backdrop, we have an administration bent on spending untoward amounts of tax dollars on dubious projects and programs. The most prominent of these new programs is the health care program known as Obamacare. Employers literally have no idea how that is going to affect their bottom lines – or the economy at large – and it won’t even be fully implemented for another year. The White House also has not been shy about enacting lots of new regulations – especially, but by no means limited to, the energy sector. Business owners are left to wonder when the next shoe will drop. I believe this type of regulatory and fiscal climate has wouldbe job creators stockpiling cash for that potential “rainy day” whether it comes or not. Recession? No recession? What I and every other American really wants to know is when is it going to get better? I don’t have a crystal ball, but, sadly, I don’t think I need one. As long as the administration continues spending and regulating at its current pace, I don’t see business owners freeing up a lot of capital. That tells me we could be mired in a mediocre economy for a long time. Even sadder, I think there is a strong liklihood that things get worse before they get any better.
