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While the mainstream economists were quick to believe that the U.S. economy is growing as the key stock indices suggest, I stood by my opinion that it isn't.
After the first estimates of gross domestic product (GDP) for the U.S. economy came out, a wave of optimism struck and stock markets rallied. It seemed as if everything was headed in the right direction.
Sadly, they were wrong.
In its third and final revision of GDP, the Bureau of Economic Analysis (BEA) reported that the U.S. economy grew at just 1.8% in the first quarter of 2013 from the fourth quarter of 2012—that is 25% lower than its previous (second) estimates, when the BEA said the U.S. economy grew 2.4%, and 28% lower from its first estimate of 2.5%. (Source: Bureau of Economic Analysis, June 26, 2013.)
The primary reasons behind the decline in GDP growth are that domestic consumer spending and exports from the U.S. declined.
Going forward, I see continued dismal consumer spending in the U.S. economy. There's no rocket science behind my reasoning, just one simple economic concept. Economics 101: when interest rates increase, consumer spending declines, because it costs the consumer more to borrow, so they step back from buying.
Remember: consumer spending is the backbone of any growth in the U.S. economy. If it decreases, our economic growth becomes questionable.
What we have seen in the past few weeks are skyrocketing yields on U.S. bonds—suggesting long-term interest rates are rising. The effects of this will eventually trickle down to places where consumers in the U.S. economy borrow to buy. One example of this type of place is the automobile sector.
Consider this: car and light truck sales are on path to increase beyond 15 million units this year in the U.S. economy—in 2009, they stood at 10.4 million. (Source: Wall Street Journal, June 26, 2013.) Will consumer spending on cars be the same if interest rates on car loans start to increase? I doubt it.
And there's another threat to consumer spending—unemployment. In May, there were 1,301 mass layoffs in the U.S. economy, involving 127,821 workers, an increase of 8.5% over April. (Source: Bureau of Labor Statistics, June 21, 2013.) When a person is unemployed, their spending is down and large credit purchases like cars are unlikely.
If consumer spending in the U.S. economy continues to struggle, it will start to show up in the corporate earnings of companies on key stock indices that are currently able to buy back their own shares and cut expenses to make their numbers appear better. Looking at the prospects of anemic consumer spending in the U.S., I remain skeptical. The optimism I see now is based on nothing but hope. Once the hangover from easy money goes away, I wouldn't be surprised to see U.S. GDP numbers turn negative. Yes, that means back to recession.
The indicators of the global economy are yelling economic slowdown ahead, but they are being ignored.
Consider the chart below of the S&P GSCI Industrial Metals Index:Chart courtesy of StockCharts.com
This index tracks the price of industrial metals like copper, zinc, aluminum, nickel, and lead. The S&P GSCI Industrial Metals Index continuously declining suggests these metals aren't being used as much—factories are not operating at their full potential in the global economy.
The reality is that the demand in the global economy is slowing down. According to Deutsche Bank and Macquarie Group, between 2013 and 2015, copper supplies are expected to exceed the demand by an average of about 500,000 metric tons a year. (Source: Wall Street Journal, June 25, 2013.)
The economic slowdown in the eurozone is still taking a toll on the global economy. Unfortunately, I think there's more to come as the bigger nations in the common currency region—Germany and France—are showing signs of stress.
China, the powerhouse of the global economy, is witnessing an economic slowdown like never before. In 2012, the country performed poorly, and this year, it's expected to do the same. China's exports are hurting, manufacturing is struggling, and the amount of credit is becoming troublesome.
As I have been harping on about in these pages for some time now, the implications the economic slowdown in the global economy could have on the U.S. economy are very vast. We are not an island nation, immune to the troubles in the global economy. We trade with other nations.
Unfortunately, as the demand declines in the global economy, U.S. companies will suffer. They will be selling less. As a matter of fact; the first-quarter 2013 revised gross domestic product (GDP) reported by the Bureau of Economic Analysis (BEA) showed that exports from the U.S. economy actually declined. In the first quarter, real exports—adjusted for price changes—decreased 1.1%. In the fourth quarter of 2012, exports declined 2.8%. (Source: Bureau of Economic Analysis, June 26, 2013.)
As the economic slowdown continues to take a stronger grip on the global economy, I wouldn't be surprised to see U.S. exports decline even further. Looking at the economic conditions worldwide, I don't hold a view that suggests there's prosperity ahead anytime soon—we have a long way to go. My advice: don't believe the key stock indices; they are far beyond reality, and they're doing a masterful job at luring in even more investors.
Originally posted at Profit Confidential
© Michael Lombardi, MBA