Monday, June 16, 2014

The Economic Rebound is not Happening

The Economic Rebound Is Not Happening

Here is what we know.
The economy has been slowing since last fall, when the impressive 3rd quarter GDP growth of 4.1% slowed to only 2.6% in the fourth quarter.
The report that it unexpectedly plunged to only 0.1% in the first quarter of this year was a surprise to Wall Street and economists. The further revision a couple of weeks ago to negative 1.0%, was a shock.
However, markets remained calm, given the assurances that the economy would rebound sharply in the 2ndquarter.
Here is what we can surmise.
The downward revisions for the first quarter have not ended.
More data is now available. The U.S. trade deficit widened further in March than previously thought, consumer spending on healthcare was lower than previously estimated, and the housing and construction industries were more depressed than previously thought.
With that new information, forecasts for the final revision to 1st quarter GDP (to be released June 25) are coming down sharply, expectations now for another substantial downward revision.
New forecasts of 1st quarter GDP:
·         Goldman Sachs: -1.9%
·         Deutsche Bank: – 1.5%
·         UBS: -2.0%
·         Barclay’s: -2.0%
·         Macroeconomic Advisers: -2.1%
However, all the data is now in for the first quarter, so that should be it.
Here is what should worry us now.
Two straight quarters of negative GDP is defined as a recession. Wall Street and the Fed assure us of a substantial rebound this quarter. However, they did not expect the 4th quarter slowdown. And while anticipating a significant weather-related slowdown in the first quarter, they expected GDP growth to remain positive, slowing to no worse than 1.2% growth.
Can we blindly trust their optimism for a second quarter rebound?
We know that if the economy plunged from 2.6% growth in the fourth quarter, to negative 2.0% in the first quarter, it will take a sizable jump, big numbers, to pull out of the slump in just one quarter. With only two weeks left in the quarter, here is what we’ve seen in key reports so far.
In spite of the positive outlook being expressed by the Federal Reserve, its own National Business Index, a composite of 85 indicators the Fed considers to be important, plunged from +0.34 in March to -0.32 in April. The Fed says that when the three-month moving average of that index drops below -0.70 it indicates the economy is in recession. Unfortunately, the index is reported with such a lag that we won’t know for a couple more months whether the April decline was just a blip, or the first step down toward the 3-month moving average being below -0.70. However, the one-month decline to -0.32 in April, rather than a spike up, is not an encouraging sign of a big 2nd quarter economic bounce-back from the winter weather.
While auto sales remain strong, as they were throughout the slowdown, retail sales slowed sharply in April, rising only 0.5% after March’s 1.5% increase, and slowed again to 0.3% in May. Construction spending was up just 0.2% in April, missing the consensus forecast of 0.7%.

The U.S. trade deficit unexpectedly widened again, jumping another 6.9% in April, to a two-year high. The Conference Board’s Consumer Confidence report for May showed that those planning to buy a new home within six months declined to 4.9%, the lowest level in 21 months, and those planning to buy major appliances fell to 45.1% in May, the lowest level since September 2011.
There were 217,000 new jobs created in May, down from 282,000 in April, with construction jobs still lagging far behind. Pending home sales ticked up only 0.4% in April, and remained 9.2% below their April 2013 level. Meanwhile, the first June reports are coming out, with the University of Michigan/Thomson Reuters Consumer Sentiment Index declining from 81.9 in May to 81.2 in June, its lowest level in three months.
Overall, what we have seen so far does not indicate the economy has rushed out of the gate in a big snap-back spring recovery. There are numerous reports yet to come for May, and particularly June, so there is still plenty of time. However, if some huge numbers are not forthcoming soon, it looks like Wall Street’s and the Fed’s rosy second quarter forecasts may also miss the mark by wide margins.
Meanwhile, here is what we know about the stock market.
It doesn’t care.
The economy may be in trouble. The market may be overvalued to levels seen at previous tops. Corporate insiders may be selling at a record pace. The world’s wealthiest (therefore presumably most successful) investors may have raised unusually high levels of cash, as reported this week by Reuters.
The market doesn’t care.
In spite of the heavy selling by some factions, the S&P 500 remains within 1.5% of its recent record high. This week’s poll by the American Association of Individual Investors shows the bullish contingent rose to 44.7% bullish this week, while the percentage of bears fell to only 21.3%. The VIX Index (aka the Fear Index) is at its lowest level since 2007.
We can’t know, but dare we surmise that this will end badly, particularly if some huge numbers don’t soon show up in economic reports? Meanwhile, investors are running out of time to follow the lead of corporate insiders and the world’s wealthiest investors. If anything most seem to be running in the opposite direction, further into the risk.


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