Signs a recession could be coming

Stocks have gotten a slight lift lately in part from the many hopes that fears over a recession are overdone. That optimism could be a little premature.

However, two key indicators are flashing warning signs: income tax withholdings and corporate profits.

The withholdings data show taxes taken out of worker paychecks and are considered by some economists to be very a strong indicator of overall economic growth. Released daily by the Treasury Department, the count is a simple non-adjusted measure of how much wages are growing.

The latest numbers showed a 0.2 percent annualized decline over the past four weeks, compared to growth rates of 2 percent in December and 3 percent in January, according to market research firm TrimTabs.

A continuation in the trend would be a recession flag, Trim Tabs pointed out in a release, though Santschi noted that the month-to-month numbers are volatile.

On top of the other economic problems that are seen, corporate profits continue to wane, providing a headwind both for the economy and stock market. Estimates through the year show that the earnings recession is far from over and could last at least two more quarters.

But the road ahead doesn’t get any easier any faster. There are some concerns.

FactSet is now projecting that earnings will decline 6.9 percent in the first quarter, a stunning move lower over time considering that in September the expectation was for 4.8 percent growth. S&P Capital IQ had been estimating the quarter to post a 15.1 percent gain in initial projections made in April 2015.

FactSet is not expecting profits to turn positive until at least the third quarter.

There are two primary culprits for the earnings weakness: Energy, which fell 74 percent in the fourth quarter and is expected to slide 93 percent in the first quarter, and the strong U.S. dollar. Companies with more than 50 percent of sales outside the U.S. fell 11.2 percent in the fourth quarter, while those with a majority of sales at the domestic level actually grew 2.7 percent.

However, more sobering economic news could be only a few days away.

On Friday, the government will release the first revision to the fourth quarter’s gross domestic product growth.

A recession is not the consensus call on Wall Street, with projections in recent days showing increased optimism. But it is clear that there are many days of turmoil and confusion ahead.

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