Trump warns of massive recession, but real threat may be 1970s-style stagflation

Republican presidential contender Donald Trump grabbed headlines again over the weekend by reiterating one of his campaigns central claims: that the U.S. is in a recession.

Trump may have a point: The Atlanta Federal Reserves GDPNow forecasting tool has now fallen below 1%, to just 0.7%. Though not yet negative, U.S. growth seems to be losing momentum.

I think were sitting on an economic bubble. A financial bubble, Trump told The Washington Post. Were not at 5% unemployment. Were at a number thats probably into the 20s if you look at the real number. That was a number that was devised, statistically devised to make politicians and in particular presidents look good. And I wouldnt be getting the kind of massive crowds that Im getting if the number was a real number.

Im talking about a bubble where you go into a very massive recession. Hopefully not worse than that, but a very massive recession.

Hollow pockets all over economy: Trumps claims brought out the usual naysayer economists in their rose-colored glasses, but the latter are ignoring a crucial point: Though U.S. GDP hasnt fallen into negative territory for the two straight quarters needed to qualify as a true recession, millions of Americans nevertheless feel as if they are living in one.

Trumps not talking to economists, said Yahoo! Finance columnist Rick Newman. Hes talking to a lot of people who feel they have been in a massive recession for years, I mean 15, 20 years. Thats who is showing up to Donald Trumps rallies by and large, and they have reasons to be angry, by and large. We do know that incomes have stagnated for a lot of people. We do know that many of the better-paying blue-collar or middle-income jobs we used to have are no longer here. And when you look at the aggregate data on the U.S. economy, you see growth; you see the economys doing OK, but there are big hollow pockets in the U.S. economy.

And to see those hollow pockets, look no further than last Fridays nonfarm-payrolls report. Although 215,000 positions purportedly were created in March, the unemployment rate ticked up to 5%, and The Wall Street Journal reported that U.S. companies have announced the most first-quarter layoffs since 2009, citing the latest Challenger Gray data.

29,000 factory jobs lost: And a closer look at the Labor Department report itself reveals that the headline numbers are a rickety faade:

29,000 manufacturing jobs were lost in March, along with 12,000 in mining, only to be replaced by record gains in retail, food services, and drinking establishments, or typically low-paying service-industry jobs.

More than 93 million Americans remain out of the labor force. Although the participation rate improved in March, the number of Americans who have given up looking for work is still higher than a year ago.

Moreover, the newly created jobs are not the type that can sustain the American Dream or get deeply indebted college students out from their parents basements. Circumstantial evidence in the latest U.S. jobs report suggests many of these newly employed workers have found part-time work with mediocre pay, MarketWatch said of the payrolls report.

Indeed, the U.S. manufacturing sector remains in a deep funk, with factory orders down 1.7% in February.

Another dismal earnings season ahead: And Trump could be right on another front: the equities bubble. The stock market could be about to get a huge wakeup call in the coming weeks, when corporate-earnings reporting season begins.

Nearly one-fifth of companies on the S&P 500 index expect to fall short of Wall Street estimates in what promises to be one of the most negative earnings seasons in a decade, MarketWatch reported.

With 94 companies already issuing negative quarterly outlooks, thats the second-highest number since tracking began.

And even worse, this will be the fourth straight negative quarter for earnings, with a decline of 8.7% projected, according to one estimate.

How much can the stock market rally in the face of the reality that earnings expectations have been steadily reduced? asked the Financial Times on March 25.

Stagflation leaving tracks across U.S.: With signs of inflation starting to tick up amid this low-growth environment, some economists are beginning to utter the S word: stagflation.

During the last year, as the economy has returned closer to full employment, the core cost structure of the U.S. economy has risen more aggressively and more broadly than ever before in this recovery, Jim Paulsen of Wells Capital Management told clients. While the U.S. is not facing runaway inflation, the concept of stagflation (i.e., rising inflation rates combined with slower real economic activity) has become much more noticeable.

Overall, for the first time in this recovery, a broad and significant rise in core economic costs is slowing job creation, real consumer spending and profitability, Paulsen said. In other words, stagflation is leaving tracks across the entire (economy).

Stagflation last reared its ugly head in the 1970s and coincided with golds run-up to its then-all-time high above $800. Bank of America has issued a report saying that gold is one asset that can thrive during stagflation, and other analysts have concurred.

Stagflation is the toughest investment regime, composed of inflation and economic stagnation, Acernis Capital CEO Avner Mandelman wrote in Canadas Globe and Mail newspaper earlier this year. The last time we saw this was in the late 1970s. And its coming again. In such a period, one of the only investments that appreciates is gold.