A whole lot of economists and market prognosticators are predicting that the United States economy is slowly slipping back into a recession. The growth rate in the economic recovery has slowed, and a lot of disappointing economic news has been released recently. Whether the economy is taking a turn for the worse or not remains to be seen. A few factors, however, could send the United States economy into a double-dip recession. Let's take a look at them. (Hyperinflation isn't some historical curiosity. It is a very real risk that countries and governments still struggle with today. Check out An Introduction To Hyperinflation.)
TUTORIAL: Introduction To The Federal Reserve
1. Decline in Consumer Confidence
Consumer confidence is incredibly fragile. The amount of money that consumers spend on goods and services directly relates to their confidence in the economy. When confidence is high, spending increases and the economy grows. Lower consumer confidence can lead to increased savings and a contraction in the economy.
The last economic recession lasted so long because consumers tightened their purse strings and spending slowed dramatically. In May, the consumer confidence index fell to 71.8, which was lower than 74.3 in April. A continued drop in consumer sentiment to the 60 level could slide the United States into a recession, as consumers stockpile cash because of economic fears.
The Federal Reserve has spent the last few years trying to stimulate economic growth by keeping interest rates as low as possible and providing stimulus to the economy. One of the government's key concerns has been inflation, as prices have been rising quickly over the current year. The consumer price index rose 0.2% in May, and prices are now up 3.6% for the current year. Inflation is a serious concern, because the Fed doesn't have many tools available at its disposal to lower inflation. Inflation forces manufacturers and consumers to spend more money for the same products and reduces their overall buying power.
Inflation has brought about many recessions in the United States when wage growth has been nonexistent and prices have increased.
3. Higher Gas Prices
Gas prices have been a thorn in the side of consumers for all of 2011. Fuel prices have risen for a number of reasons including supply disruptions, speculation and inflation. Consumers are being forced to spend more money at the pump, which quickly cuts into their discretionary spending. Four-dollar-a-gallon gasoline is leaving little money for consumers to buy staple products, luxury items and take vacations. If gas prices remain high, consumers will cut back on travel and purchases, which will directly affect hotels, airlines, automobile manufacturers and retailers. These sectors would suffer heavily from decreased demand.
4. Rising Unemployment
Unemployment has been an issue for the United States since the great recession of 2008. The economic recovery seems to have run out of steam since it was largely a jobless recovery. Just when the job market appeared to be headed north, the unemployment rate rose to 9.1% last month.
A high unemployment rate means fewer dollars are available to spend in the economy. This leads to lower or negative GDP growth, which can quickly move the economy back into a recession. More unemployed Americans means lower cumulative wage growth and lower spending. (Preparation can help you land on your feet after getting the old "heave-ho". Check out Planning For Unemployment.)
5. Stock Market Correction
The last economic crash brought us Dow 6,600, in which millions of Americans saw their balance sheets trimmed. Americans lost $16.4 trillion in wealth during the previous recession. Most of the wealth of Americans is in the stock market and the housing market. The housing market is already depressed, and any perceived weakness in the economy could lead to another stock market crash. This would erase trillions more in household wealth and would depress investment in the country. There would be less money available to spend, and savings rates would increase. A second market crash would test the faith of many investors who would likely never return to the market.
The Bottom Line
If the United States economic recovery is to continue, then the aforementioned factors will not occur. A healthy recovery will entail positive consumer confidence, rising employment, lower gas prices, lack of inflation and a vibrant stock market. (Find out what most investors are doing wrong, and how you can do it right. Refer to 10 Timeless Rules For Investors.)