The United States could be on the verge of a recession. Some economists think that the collapse in commodities prices is about to drive a large portion of America’s heartland into a prolonged economic decline.
The U.S. economy is on such shaky ground that any drop in consumer spending could send the whole country spinning into recession, Joseph LaVorgna the Chief U.S. economist at Deutsche Bank Securities in New York, told Bloomberg Business. LaVorgna thinks that America will only avoid a recession if consumer spending remains robust, but if it falls, a major downturn will begin.
“If the consumer were to falter for any reason, that would be a big problem,” La Vorgna admitted. He thinks that because parts of the United States are currently in a recession because of the collapse in oil prices.
Where the Recession is
Four U.S. states, Alaska, North Dakota, West Virginia and Wyoming, are already in a recession because of the collapse in oil and gas prices, Bloomberg reported. West Virginia is affected by falling gas prices because of the decreased demand for coal; cheaper natural gas is slowly replacing coal in America’s power plants.
This is frightening because Wyoming and North Dakota were two of the states that were leading the economic recovery. High prices and fracking fueled an economic boom in those areas, and in some cases, a level of activity not seen in generations. West Virginia, which was already an economic basket case, is about to get worse.
The U.S. Labor Department reported that 18,800 people in North Dakota, 11,800 people in West Virginia, and 6,400 people in Wyoming lost their jobs in 2015. If these figures are true, it means around 37,000 jobs disappeared in those states. That’s particularly bad news because the jobs that vanished are likely to be high-paying ones in oil fields or mines.
Three other states, California, Florida, and Texas, did add around 800,000 new jobs in 2015. The problem with that figure is that a large percentage of those positions were likely to be low-paying service jobs.
Income Inequality to Get Worse
That means this recession could make income inequality much worse and give it a nasty regional twist. Anger and frustration will grow as working class people see positions disappear in areas where they can afford to live. Another problem is that some of the new jobs are being added in places where working people cannot afford to live.
To add fuel to the fire, job losses are likely to hurt groups already reeling from the downturn of the past 15 years, in particular, rural whites and white men. Incomes for white Americans have declined by around 2% over the past few years, according to Pew Research, which explains some of the popularity of presidential candidates Donald Trump and Bernie Sanders.
U.S. Farmers have Lost More than Half their Income
What’s truly frightening is that America’s farmers saw over 50% of their income disappear over the last three years, The Des Moines Register reported. America’s farm income in 2012 was $123.3 billion in 2012 and $57.8 billion in 2015, meaning $65.5 billion vanished from America’s economy in the past three years.
To make matters worse, farm income in the United States is expected to fall by 3% in 2016, declining from $57.8 billion to $54.8 billion over the course of the year. That means America’s farmers are in recession and could be facing a crisis as great as that of the 1920s, which helped cause The Great Depression.
Not surprisingly, this will disproportionately hurt rural America by greatly reducing farmers’ buying power. One result will be to heat up the retail apocalypse in the heartland and send more stores into bankruptcy.
A major force driving this decline will be cash income on the sale of commodities, which will fall by $9.6 billion, from $377.1 billion to $367.5 billion. Prices for animal products, such as meat and milk, are expected to fall by $7.9 billion.
Crisis on the Farm
What’s truly depressing is that the average farm family in the U.S. will see an income of $17,769, according to the U.S. Department of Agriculture. That means the average U.S. farm family is living several thousand dollars below the poverty line.
Under the 2016 Federal Poverty Guidelines, the poverty line for a family of four starts at $24,300. In 2013, the average farm family was living above the poverty line at $28,867.
Not surprisingly, the debt to equity ratio for farmers has been rising, and some of them are not going to be able to pay their loans. That means we might see bank failures and foreclosures on the farm.
Some farmers will also be driven out of business because prices for seed, fertilizer, land rents, and other farm expenses have not fallen, Michel Hein, the vice president at Liberty Trust and Savings Bank in Durant, Iowa, told The Register. Hein noted that more farmers are already restructuring loans or refinancing loans.
This means farmers will spend less, which will mean less consumer spending. It will also increase racial and regional tensions because rural whites will be disproportionately affected by the farm crisis.
It looks as if America could be on the verge of a recession. Investors had better be careful and avoid stocks driven by consumer spending until they see how it goes.
One has to wonder how this new economic downturn will affect the growing social tensions and the presidential race. A likely beneficiary is Bernie Sanders, whose agenda is looking more attractive in an increasingly impoverished heartland.