INVENTORIES AND INVESTMENT, TOO HIGH AND TOO LOW
If we accept that consumers won't, and often can't, stop spending unless forced to, then the impulse for a recession would have to be from elsewhere. Global conditions are obviously one possibility, with growth slow or slowing in Europe, Britain and China.
Closer to home, the business sector looks tired, cautious and, as noted, flagging.
Inventories, the stock of goods businesses keep on hand, decreased in the quarter, contributing sizably to the lower-than-expected rate of growth. In real terms, private inventories are close to being in contraction, something that in recent history has gone hand-in-had with either a recession or an imminent one.
Sales were not keeping pace with the previous build-up of inventories, which was not simply due to over-confidence by business, but also to cautious consumers. The last two times the business inventory-to-sales ratio got this high and then began to decline were in 2000 and 2008. The first time the U.S. economy was less than a year from a recession and in 2008 we were smack in the middle of one.
Capital investment is down, driven in significant part by the oil bust, but not entirely. Business spending on equipment fell at a 3.5 percent annual clip in the quarter and has been in contraction for nine months. Investment in non-residential structures, including things like oil wells, fell 7.9 percent in the quarter. But even if we exclude mining-related areas, fixed business investment is basically flat for the last two quarters.
U.S. oil prices fell back into bear market territory on Monday, down 22 percent since early June, after a Saudi price cut.
It is not too hard to imagine a scenario in which we have a U.S. recession that happens not because of some external shock, but simply as businesses slow hiring, banks tighten credit and consumers perforce cut back.
You can see why the Fed would like to get past the U.S. election before moving again. If there is to be a recession, it has little room to cut and few other tools with good track records.
Fiscal stimulus might help, but there is considerable difference in the inflation and other implications if that takes the form of Hillary Clinton building airports or Donald Trump building a wall.