Are We Teetering on the Edge of Recession

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On a technical basis we doubt we are dipping into a recession  (2 successive quarters of negative growth)—yet.  While the 1st quarter was weak with negative growth of .7% we think that we will likely have positive growth in the 2nd quarter, although we think it is more likely a 1-2% growth instead of the 2.5-3% the smart people are forecasting.  So why do we believe that this is the case.

Our primary thoughts center around employment–or lack thereof.  We know that the official stats are showing that job growth has been in the 225,000/month area for quite a long time and that the official unemployment rate is 5.4% (near full employment in the olden days). We take these numbers with a very large grain of salt.  Our personal observations are somewhat different, but maybe because we tend to view so many of these jobs as ‘lousy’ jobs—jobs held by people that are vastly overqualified for the position.  For the Midwest we follow economic conditions with a respected survey out of Creighton University in Omaha.  This is a monthly report covering Oklahoma, Kansas, Nebraska, Iowa, Minnesota, North Dakota, South Dakota, Missouri and Arkansas. While this is not the population center of the U.S. it certainly reflects the agricultural economy as well as quite a bit of energy production and manufacturing.  The latest survey can be found here.



Reviewing the Creighton survey we see that 4 of the 9 states have fallen to predicted negative growth in the 3-6 month period ahead. As one might expect North Dakota and Oklahoma have fallen below growth neutral the most (with a 50 reading being neutral). Of the 9 states all but one are now expecting negative employment growth in the months ahead–the 1 with expected positive growth is South Dakota. 

As we personally survey the employment situation in the region we have seen agricultural related businesses (i.e. John Deere) laying off people, energy firms cutting back dramatically and further the consequences of these weak industries is continuing to ‘ripple’ through the midwest. For instance Donaldson Company in Minneapolis has slashed sales forecast for this quarter–now saying sales will be down 11-12%. Donaldson is primarily a maker of filtration equipment and filters for industrial use. A large chunk of their business is energy and ag related.  Donaldson has now announced at least 1 plant closing and is restructuring (code for layoffs).  The strong dollar has had a strong negative affect on the company. Looking into northern Minnesota we see most of the iron ore mines have now been closed down. When mines close on the ‘iron range’ of Minnesota it effectively closes down the economy in the northern portion of the state—the ripples from losing 1000’s of high paying mining jobs are strong and touch almost every facet of life and have the potential over time to create ghost town in the region (the iron range has always been a feast or famine economy). 

Looking further at the ag sector relative to employment we can say from our personal observations that when farmers get hurt, everyone gets hurt. While I have observed that ‘metro’ focused folks tend to think they are insulated from the fortunes of farmers this isn’t the case at all. When farmers have great earnings (i.e. 2010-2012) they SPEND like CRAZY. The number of grain storage bins that have been put up throughout the midwest is incredible. New tractors, combines, spray equipment, houses and house remodels, new pickup trucks you name it, they buy it. These items are all goods sold by companies with headquarters in metropolitan areas–in the end folks lose jobs. It appears that while farmers have been able to forward sell crops up to now to keep losses minimal this cycle is coming to an end and just like oil as long as you locked in some hedges you can survive for a few years, but these eventually roll off and you are stuck with selling for losses. At this point in time it looks like crop prices for 2015 will again be low further endangering the ag economy.



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Tim McPartland

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Tim McPartland
Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
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