Paul Mortimer-Lee of BNP Paribas warns that many don't see a "storm brewing" in the U.S. economy, citing problems in the economy's corporate sector, Business Insider
"Why have so many, including the Fed, not seen the risks that now appear all too concrete?" asked Mortimer-Lee, chief U.S. economist at BNP.
"The answer is that they have been looking in the wrong direction, lulled into a sense of complacency by strong jobs growth and solid consumption. What this view has overlooked is that the threat of recession comes from the corporate sector," argues in a note titled "US Growth: Storm Brewing?"
Mortimer-Lee warns that the drop in profits in the corporate sector can foreshadow a recession.
"We believe that in an economy with a significant profit-oriented private sector, the rate of profit and its dynamic is a key determinant of the business cycle," Mortimer-Lee wrote.
"While some have argued that cycles don't die of old age, declining rates of profitability are often a sign that the economy is very sick, no matter what the age of the recovery," he wrote.
"But capex has been weak recently. Oil investment plays a part, of course, but the bigger picture seems to us to be that previously weaker corporate profitability as a share of GDP is beginning to feed into weaker capex with a lag," Mortimer-Lee wrote. "Frequently, such episodes do not end well."
Mortimer-Lee projects that the risk of recession over the next 12 months is somewhere between 40% and 50%, depending on how terrible the incoming labor market data looks
"We will need to hang on to our hats, because it's going to be a bumpy ride," Mortimer-Lee wrote. "The risk of recession is rising."
Mortimer-Lee isn't alone in his fears about the U.S. economy.
Former Fed Governor Robert Heller told CNBC
that the nation’s central bank has to continue raising interest rates or risk plunging into yet another recession.
"There is a very dangerous scenario building up in the U.S. because the rates are so low and for so long," Heller, who was on the Fed's Board of Governors from 1986 to 1989, warned.
Heller described a wide variety of economic risks from low rates of investment returns.
"Pension funds and insurance companies will sooner or later have a very hard time fulfilling their obligations and that would be definitely triggering the next recession," he said. "When that will happen, when they will run out of money, when they cannot fulfill their obligations, nobody really knows, but that may be the trigger for the next big downturn in the U.S."
The U.S. economy last entered a recession — defined as two consecutive quarters of year-on-year economic contraction — in December 2007, after the housing bubble burst, leading to a global financial crisis. That recession, dubbed the Great Recession, ended in mid-2009, making it the longest U.S. recession since the end of World War II, CNBC reported.
(Newsmax wire services contributed to this report).
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