Economy Still Tottery: Is it Presaging Another Recession?

As the market works in cycles, from undervaluation to over-valuation, and back again, the currently overvalued stock market is likely to burst soon, pushing the valuations to historically low levels.

The major market indicators, from foreclosures to unemployment, are signaling that the economy might be heading towards another downturn.

Here are 10 bad economic signs, warning Americans to watch out and prep up for tough times ahead:

1. Stock Market is Fatally Expensive
With the stocks on the rise and sentiment indicators up, one might judge that the economy is poised for roaring bounce back. But the deteriorating economic indicators, and price/earnings ratio model indicate that another bear market may be in the offing.
Many analysts believe that stocks are not fairly reflecting the current economic scenario, as economy is unstable, yet the stocks are shooting up fast and scaling new heights as seen before the financial crisis set in in January 2008.

Also, the average P/E ratio of stocks is high, 17.59, meaning that investors are willing to pay nearly $17 for $1 of current earnings. This ratio is near the 18 to 20, the upper boundary, which was only exceeded during stock market bubbles in 1920's, 2000, and in late 2008.

As the market works in cycles, from undervaluation to over-valuation, and back again, the currently overvalued stock market is likely to burst soon, pushing valuations to historically low levels.

2. Fed is Worried
Though Federal Reserve had earlier stated that growth is percolating to all states in the nation, discussions have already started among Fed members on how to ward off another downturn.

To ensure that recovery continues unabated, the central bank is now reinvesting the proceeds from mortgage holdings into long-term Treasury securities to prevent liquidity drainage from financial system.

Also, the fed has left interest rate unchanged, between zero to 0.25 percent, hoping that record low rate will bolster the economy.

3. Analysts are Pessimistic
Not only is government nervous, even economists are worried. For instance, Paul Krugman, in his recent column in The New York Times, stated that the nation is “in the early stages of a third depression.”

Even John P. Hussman, Ph.D., President, Hussman Investment Trust, asserted that the U.S. economy is heading towards another “challenging downturn.”

Also, 53 economists, surveyed by The Wall Street Journal last month, offered a bleak picture of the economy, stating that they do not expect job figures to improve before June 2011.

4. Jobless Rate is High
Even if the government's assertions of recovery are to be believed, why is this re-bounce not translating in employment in America?

Though jobless rate had declined to 9.5 percent in July, it inched up to 9.6 percent in August as employers laid off 54,000 employees. Also, 114,000 temporary census workers lost jobs last month.

Overall, 15 million workers were unemployed in the nation in August.

5. Foreclosures are Rising
Initially, it seemed that the mortgage crisis was loosening its grip on the housing sector, but after receding for three straight months, foreclosure activity has picked up the pace in the nation.

In July, 325,229 houses received foreclosure notices, and 93,000 homes were seized. Not only have foreclosures increased, they exceeded 300000 for 17th consecutive month.

The investment bank Barclays Capital believes that the mortgage crisis will reach its peak in the second half this year. Reiterating the same sentiment, Lawrence Yun, chief economist for the Realtors, added that foreclosures will touch 2.5 million this year.

6. Banks are Being Advised
The banks have been adversely affected by dramatic rise in mortgage delinquencies last year. With foreclosure crisis continuing, the financial institutions might take another hit.

Also, default rate on student loans has been surging. For instance, one in every five government loans that entered payment in the last 15 years has defaulted.

With loan default rate high, and other market indicators low, the banks have been advised to keep their guards up and build the 'cushion' against another financial crisis.

In the recent G20 meet held in Canada, the leaders of various countries, including U.S. President Barack Obama, agreed to ensure that financial institutions hold enough cash to successfully tackle another economic downturn.

7. Debt is Surging
As per the data released by government, the total public debt outstanding of the nation is $13.258 trillion, as of July 2010. But what is worse is that it is approximately 93 percent of our annual gross domestic product (GDP).

Further, debt is likely to surge in future. The Obama administration's health care reform bill will be adding up to total cost. Even the aging retirees will put strain on social security and Medicare.

Also, with government continuing with relief programs, bailing out struggling home owners and financial institutions, nation's debt may soon surpass 100 percent of GDP.

If government fails to increase its revenue and debt crosses 150 percent of GDP, inflation may spiral out of control, proving devastating for our economy.

8. Consumer Spending is Low
After declining for three consecutive months, the U.S. retail sales rose 0.4 percent in July.

Though consumer spending has looked up, sales have not increased in all categories, indicating that Americans still lack confidence about recovery--and in their finances--to increase spending.

Excluding autos and gasoline stations, key sectors like clothing, sporting goods, grocery, electronics & appliance stores, etc., lost ground in July.

For August, major retail stores reported increase in sales, but increase in consumer spending last month has largely been due to back-to-school discounts and tax holidays offered to the consumers. Over all, the consumer sentiment is still low.

9. Deflation is Feared Coming
Prices of consumer goods have fallen for three months consecutively till June. This has adversely affected wages of workers. According to the data released by Bureau of Labor Statistics, the workers earned 0.7 percent less in real terms per hour.

Though in July the consumer price index climbed a little, 0.3 percent, all thanks to high energy costs, prices must continue to rise in months ahead to assuage deflation fears.

Being a vicious cycle, deflation leads to fall in wages, investment, value of home. etc., but the debt level remains the same. This adversely affects those who owe a lot.

10. US States are Facing Worst Budget Situation
Shifting the focus from national level, let's see how the 50 states in the nation are performing.

Nearly 46 states are facing budget shortfalls.

The states have raised sales tax and cut spending to wipe deficit gap, but this move has adversely affected GDP.

According to the Center on Budget and Policy Priorities, “That runs counter to stimulating the economy and will put a big damper on the recovery in the latter half of this year.”

The aggregate budget deficit may cross $140 billion in this fiscal year, claims the govt. research firm.