The Federal Reserve is Too Optimistic: This Looks More Like Another Recession

Listening to official and off-the-record comments coming from the Federal Reserve, noting the government’s reports on declining unemployment and optimistic representations of the country’s economic outlook, one would be inclined to believe that the U.S. economy is finally on the upswing.

After years of minimal growth following the most severe recession since the Great Depression in the 30s, it would, indeed, be time to see real growth in GDP and a reversal in Americans’ average income declines over the last decade.

The Fed is allegedly serious about the first interest rate hike in years before year’s end, an enormous shift from an almost zero rate imposed at the height of the worldwide financial crisis. The media considers this further evidence of an expanding economy, since it is generally assumed that the Feds would not start raising rates unless they were convinced that the economy was expanding.

But excuse us here at The Canary for not giving too much credence to what the Federal Reserve believes. As we recall, their track record in assessing where the U.S. economy is headed was not too stellar before the last recession either. Why would we expect them to do any better now?

Let’s recapitulate on what is really going on. To do so, we have to start with a quick worldwide survey, which is relatively straightforward because practically the whole world, except for the U.S., India and a handful of other countries, are already in recession. The most important contributor to the likeliness of a worldwide recession is China. Widely reported by the media, China’s growth rate has started to decline. Economists had predicted that double-digit growth rates were unsustainable but had counted on the ability of the Chinese government to “manage” the slowing of national growth to avoid economic shocks around the world.

There were reasons to trust in the abilities of the Chinese government to manage the county’s economy proactively because it did so very successfully during the 2008 financial crisis. But this time, the Chinese government failed, as witnessed by the crash of the Chinese stock market and the sudden slowing of the annual national growth rate to even below the “promised” 7%. Latest reports suggest a likely 2015 growth rate of 6.5%, and since Chinese government data are untrustworthy, the real growth rate can be expected to fall below 6%.

For any country in the world, including the U.S., a 6% growth would be cause for celebration; for China however, it means almost unmitigated disaster because it suggests continuous uncontrollable declines. Significant economic growth is, however, required to continue improvements in living standards of their one billion peasants and maintenance of social peace.

Declines in economic growth in China have even more significant effects on the rest of the world because, as the largest consumer of raw materials, even relative small declines in Chinese raw material purchases exponentially exert down-pressure on commodity prices around the world, leading to worldwide price deflation and declining growth.

On top of this you can add most volatile political situation in the world since the 1930s, almost revolutionary levels of political dissatisfaction with the political class in most Western democracies (including the U.S.), a European Union in economic as well as political crisis, the largest refugee problem since WWII, and a revanchist and increasingly autocratic Russia with expanding military foot print. It becomes difficult to envision how the U.S. economy could remain an island of growth in an otherwise economically depressed world. Moreover, have you noticed the unprecedented number of empty stores available for rent, in most major U.S. cities?

But here is the real reason why we forecast an economic recession in the U.S. in the very near future (we, indeed, may already be in its early stages): It has been known for decades that birth rate declines are a consequence of a recession. According to national U.S. Birth Registry data, the 2008 recession resulted in the largest recorded decline in national births (of course, nine months later) reported since the 1930s. More recently, a related prognostic “index” was reported when a group of fertility specialists reported that the demand for their services declines significantly during recessions. Indeed, declines in demand for fertility services abruptly declined a number of months before the 2008 recession officially began.

Our friends in the infertility industry are telling us that after continuous growth over recent years, they suddenly encountered a similar downturn similar to those experienced in 2008. Following the 2008 timeline, this would suggest the beginning of a recession not later than November/December of this year.

It will be interesting to see who is a better predictor of U.S. economic activity: The Federal Reserve or the natural instincts of human beings, who automatically reduce reproductive activities when they intuitively sense hard times ahead. We put our money on human intuition and, in full disclosure, have gone into cash.