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This could be the 'black swan' that tips the economy into recession: economist

CNBC CNBC 13/05/2016 Andrew Duguay, senior economist at Prevedere

We are in the midst of a deceleration in the economy, and the chain of dominoes leading to a recession has started to fall.

First, it was a weak global economy. Then, multinationals and business-to-business companies were hit by the resulting decline in global trade and commodity prices. 

Now, consumers are starting to feel the repercussions as they draw down their growth in spending on discretionary goods and services, which we saw reflected in the first-quarter GDP report.

This is the foreshadowing of a recession. We saw similar indicators prior to recessions in 2001 and 2008.

Although there is potential for economic indicators to flip, the current momentum and indicators suggest that the U.S. economy will get worse before it gets better.

But we now we have a sense of what the black swan will be for the economy: the weak consumer. 

Friday's retail numbers are very significant in telling us just how weak the consumer will be in the second quarter.

It is the first critical pit stop on the road to either economic recovery or recession and gives us our first taste for where Q2 GDP will land.

Consumers have been propping up the economy over the last two quarters, and as the first month of Q2, this number is the first indicator we'll have into the trajectory of consumer sentiment, and whether deceleration has continued.

If the numbers fall below expectations, this will require a huge rebound over the next two months in order to move in the direction of economic acceleration in Q3.

If numbers are good, this will be the first good sign that the consumer — and the economy — are making a comeback.

Following the most recent jobs report that showed stagnant wage growth, there is reason to believe that retail numbers will not offer an optimistic outcome.

Following yet another blow to the economy, there will be three key indicators that will most impact consumers (and the economy): wages, inflation and consumer sentiment.

Average weekly earnings for non-supervisory employees are only 1.3 percent above year-ago levels and slowing.

Wage inflation has lost a full percentage point since the beginning of year, bringing us to the lowest rate of wage growth recorded since 2009, when we were bottoming out from recession.

Consumers are somewhat protected by the fact that overall price inflation is down, so they are not faced with higher prices at the grocery store or gas pump, but most people's feelings about wealth are likely in nominal terms. Someone who doesn't get a raise feels worse than a person who gets a 5-percent raise, even if consumer prices are falling for the first person and are rising at a 6-percent rate for the second person.

This lack of "nominal" wage growth can have impacts on consumer behavior and thought, and so far in 2016, we have seen deceleration in consumer sentiment, a big driver of future retail sales.

People no longer feel better than last year, so why would they spend more?

The critical factor that could tip things from cautious to very problematic is if price inflation starts to kick up.

This hasn't happened yet, so it is a hypothetical, but given how much prices have fallen and that most commodities have developed some floor over the past six months, it wouldn't be unreasonable for prices to regain some traction in 2016.

This is especially true with monetary policy all over the world being very loose and interest rates low.

For example, oil prices finished their major decent last summer before settling at between $30-40 per barrel.

Oil is the basis for other commodities; so while we saw food prices plummet in tandem with oil, we can expect food prices to rise or adjust with oil.

Even if oil rises to $50 a barrel as high cost production is cut around the world, it is a 25-percent to 65-percent increase over this winter's prices.

That could certainly move the needle on the consumer-price index and hurt the consumer.

While many economists remain optimistic about the economy given the history of a weak first quarter over the past five years, we have clear indicators that our current economic scenario is not vastly different from the early stages in 2001 and 2008.

Consumer sentiment will be key in determining whether we in the midst of a weak economy, or in fact on the road to recession.

Commentary by Andrew Duguay, a senior economist and data scientist with Prevedere Software. Prevedere is a big data predictive analytics solution that aims to help companies increase profits and outperform competition by automating the analysis and identification of leading external drivers. Follow him on Twitter @AndrewDuguay1.

For more insight from CNBC contributors, follow @CNBCopinionon Twitter.

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