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Where the heck is this economy headed? That’s a question Wall Street (and I) have been wrestling with.
Fortunately, we got a ton of fresh data this week to shed some light on the answer. The early week results were somewhat of a mixed bag. Home prices rose more than expected, as did April personal spending. The national ISM manufacturing index slightly topped forecasts … but the regional indices for Dallas and Chicago stunk up the joint.
Then we got a look at the ADP jobs report yesterday. It showed the U.S. economy adding 173,000 jobs in May after adding a (slightly) upwardly revised 166,000 in April. That’s a noticeable downshift from the kinds of readings we saw in late 2015 and early 2016 … and a big decline from the 200,000-300,000 readings we consistently saw in 2014, as you can see in this chart:
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The weakness is most evident in manufacturing, which lost 3,000 jobs in May. But construction employment growth has also been trending lower, falling to a six-month low of 13,000.
Speaking of construction, we learned Wednesday that spending in that industry plunged 1.8% in April, compared with forecasts for a 0.5% increase. That was the worst decline going all the way back to January 2011.
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Nonresidential construction dropped 1.5%, while government construction fell 2.8%. But one stat really stood out, considering the massive apartment glut and REIT frenzy I’ve been warning about: Multifamily construction plunged 3.1%. Could this be the start of a major comeuppance in that corner of the commercial real estate business? Absolutely!
As for autos, sales dropped 6% year-over-year in May. That was the biggest monthly plunge in almost six years. Individual automakers like General Motors (GM) and Ford Motor (F) missed estimates by a huge margin. Retail buying cooled, forcing companies to resort to lower-margin rental-fleet sales (again). And the decline occurred despite incentives jumping 11% to an average of $3,000 per vehicle, according to Autodata.
Look, I haven’t been shy about the auto industry: It’s a disaster in the making. We have too much auto inventory, too much lending to lousy borrowers, and too many borrowers upside-down on existing loans. Automakers are going to be forced to slash production in the coming months, and that’s going to take even more wind out of the economy’s sails.
Bottom line: Banking on a big resurgence in the U.S. economy doesn’t look like a wise move to me. The data suggests we’re losing momentum, not gaining it. And if I’m right about where we are in the credit and economic cycle, conditions will be getting worse rather than better as 2016 plays out.
[Read More – Yet ANOTHER Billionaire Warns About Coming Chaos – Mike Larson]
That means investors like you should continue to play defense. Focus on higher-yielding, stable companies in less economically sensitive sectors. My favorite picks are in my Safe Money Report, which you can get your hands on here.
Watch the yield curve, too. It continues to flatten relentlessly — a sign the bond market is continuing to buy into the slowdown idea. The last time this happened was 2007, one of the single-worst times to buy stocks in the 21st century. Food for thought.
Until next time,
Mike Larson
Recommended Articles by Mike Larson:
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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The automakers, in their infinite wisdom, refuse to build the small trucks I want to buy. I refuse to buy the oversized trucks they want to sell. I am unable to replace my Ford Ranger which has taken me over 200,000 miles. So, no one wins!
Those oversized trucks are sociopathic. That’s the only word I can think of for such monsters being used as passenger cars. (For work and commercial purposes, such trucks make sense — I’m criticizing them in personal use.)
I hold gold and precious metal mutual funds. With what has been said I wonder about the ETF Pocter and Gamble a breakfast cereal producer.
I couldn’t agree more! I’ve been trying to get my wife to get rid of hers for some time and when i mention it she crys! Only occasionally carries more than herself and gets terrible mileage, but is great at costing thousands in major repairs!!!
YOU can win. Don’t replace the Ranger. Based upon MY experience, you have at least 60,000 more miles left in it. I’m hoping for 300,000.
Ford dropped the Ranger because tech advances have the full size getting equal mileage to the Ranger-no real advantage. Notice how the canyon/Colorado
have grown?
Pete
Some people prefer the smaller trucks because they are more maneuverable and easier to park in tighter spaces and smaller parking lots .
I have been watching your stock market indices daily for a while and its a leap frog game at best. US goes up a tad and Asia and Europe follow. It drops a tad and Asia and Europe follow again. Its a follow the leader market minus any local fundamentals. The US investors are picking out any small nuggets of good information to be found and jump on it ignoring the mountain of negative data. Investors look at earnings seeming to see all is well they did not drop as much as economists expected so lets buy. What a topsy turvy world. Wave bye bye to all reasoning.
Henry Ford raised the wages of his workers to allow them to purchase the cars they were building. That would be impossible today.
Heyward
One of the Main reason Henry Ford raised his wages was to keep employees who were already trained from going elsewhere for work . Before Ford raised his wages the employee Turnover Rate was really high and his company had to keep training new people all the time which took time and reduced productivity .
Vinman
About declines in real estate…. not here in Walnut Creek… there is an insane amount of high density housing construction in the downtown area that has created such a mess of traffic, residents avoid it. So the city responds with “There’s more to come, if you think this is intense”. This high density, high expense to rent construction seems to be permeating the entire region. So it’s making a big bubble of non-sustainable rents which will lead to more middle class homelessness, vacancies and massive exodus from the state for more affordable living. In the meantime, the pressure is building, like a pressure cooker.
where is Walnut Creek, What State?
Walnut Creek is in northern California, the Bay Area.
walnut Creek is in California. Middle part of the state.
It has always been surprising to me that the government always paints a rosier picture of the economy to give you a false image of how great they are doing. They need to wake up and smell the roses instead of trying to paint them.
It’s important to pay close attention to what those numbers count. The jobs report counts *jobs*, not people employed. Increasingly, people are working part-time, multiple jobs, etc. To count people, look at the workforce and labor force participation.
I agree with you on this! I think we are in a fake bubble, especially since we are over 20 trillion dollars in debt!
True if the interest rates were to go to a more normal 5% the interest on the debt would be a Trillion dollars ! The Fed the government to get its finances in order with the gift of low interest rates on its debt . But instead of getting its house in order by trying to balance the budget the government doubled down and continued to borrow and spend ever more money which leaves us in the Bind we are in today . You can only kick the can so far down the road before it gets crushed !
Correction !
The Fed Bought the government time to get its finances in order
Well just watched gold pop $30 an ounce along with other precious metals as the May job numbers came in a real stinker at 38,000. I checked my gold stocks which are the only thing I buy any more and got a $2,500 pop in the first 10 minutes of trading. Well it looks like the Empress Yellen is finally found out for what she truly is a Fed bank governor with no clothes laid bare. Bring on your hawks and doves statements Janet we are waiting with our gold guns primed. Yes employment numbers are a rear view mirror indicator of the economy not a leading one. Talk yourself out of this one Yellen.
That’s all I buy too, and silver.
I am here in Detroit auto land, May 2016 car sales not all bad as May 2015 had 2 fewer selling days, FYI monthly car sales are compared year to year. Yes, car makers are turning to more leases and subprime loans with higher incentives to move iron. Good news is the average age of the US car fleet is still over 11 years and car driving population in the US keeps increasing so I see good car sales for another 2 years or so before next big downturn with car makers margins getting squeezed unless there is a black swan event that destroys consumers confidence.
Millennials, until now, have not shown the desire to own homes that previous generations have – possibly because of the debt loads many of them have incurred while getting their educations. That may help explain why they are typically marrying later. They just couldn’t afford to begin families at earlier ages, much less buy houses. Actually, early members of that generation may now have reached a point where they feel able to buy, rather than rent. That may be why prices of houses are starting to climb, as they have lately. Also, hard working immigrants, legal or not, may be reaching the point, economically, where they can afford to buy, rather than rent. While I basically agree with Mike, I think there may be forces quietly working in the background that may make the imminent retrenchment not quite so bad as it appears. Larry’s Dow, 50,000, may come sooner than we think.
I just don’t see this economy doing anything other than struggling. An overbearing govt that engineers numbers, a fed that prints trillions of worthless dollars and millennials graduating with huge debt and degrees that don’t translate into good jobs. An improving economy and a govt committed to making hard choices to get spending under control could let us start making headway against our unsustainable debt. We should make a Herculean effort to bring jobs back to the US and make the things that we all use every day. Yes ,they may cost a little more, but that would stem the outflow of dollars to other countries and increase tax revenue , reduce welfare costs and create more consumers to continue to stimulate the economy
Hi Mike!
I have a great respect for your analyses of all markets, and the most important scenario and timing factor of all—as I’ve studied for 40 years!—are the planetary influences (commonly called astrology). Right now, and for even the next few years, a powerful confluence of outer planets (Saturn, Uranus, Neptune and transformational PLUTO!) are in the same solar system positions as they were during the Crash of ’29 and the ensuing Great Depression! Since the death and rebirth influence of Scorpio (October 23-November 22) usually has a dramatic and drastic negative effect on stock markets, the current ambivalence at Wall Street might continue to October, but it doesn’t seem likely. Moreover, 2016 is a number 9 (2+0+1+6) world year of ENDINGS (such as a male dominance of the U.S. presidency), so many conditions and situations will be expiring and terminating!
Well, your news on the auto industry is good for me as I am looking to get a car this year and a low mileage pre-owned is great for my plans. As to Real Estate, here in CT, we are seeing less and less tenants fillingin the big boxes that are closing but for strip centers, well located the rents continue to escalate. Many tenants, mom and pops and small regional chains are getting priced out of the markets. We are still short on rentals that anyone except executives can afford.
I was rather stunned when the terrible numbers had little effect on Friday’s stock market then it dawned on me that investors are junkies and they feel that these terrible employment figures will again pry open the Fed money spigot. Being Friday I thought investors would not go long for the weekend but nothing happened. Forget company profit and loss. The market is 100% dependent on the Fed following Japan and Europe. It will again be a tag team effort to see who can get to the bottom first. We sadly have lost all reasoning its now been replaced by naked greed plain and simple. I can now see your point for Dow 31,000 it will be a Fed fiesta free money orgy not profit driven
In Australia cars are small have the tech, In Australia you can buy any size ute you like, come and live here, people are great, most have updated vehicles all we need now is a change of government and Australia will be even better to live in.
Houses have gone up here in Reno/Sparks NV. I am putting my house on the market but been told I should not buy right now because they are going to go down again.
I saw this in 2008, when houses sold like crazy and went up so high and fast that it put locals out of the housing market and then boom, it crashed pretty hard. Nevada had one of the worst housing repossessions in the country.
Now, some are saying that it is going to keep going up because of Tesla coming in. Not quite sure what to do and would appreciate some advise and insight.
I see the same thing happening that happened in 2008, but I could be wrong!
Great article. About time some truth hit the reported numbers. I’m just curious how it managed to slip by the propaganda machine and let the real numbers slip through this time. I have felt that something just isn’t right for the past few years. The Fed keeps yapping about raising interest rates but intuitively, we know that the grossly insolvent (bankrupt) government, will be the biggest losers of an interest rate increase, who are already spending 40% of every dollar that comes in, on interest on their horrific debt. Doubling their interest rate to a measly 1% will put their debt-service ratio at 80% of their income. If you or I went to the bank to get a mortgage that ate up 80% of our income, we would be turned down. Just a little while longer and the world lenders to the US, will turn down the US governments’ application for a bigger mortgage. The US credit card is maxxed out and they won’t even be able to make their minimum payment. Pretty damn sad! Gold and silver reigns supreme as non inflatable money.
How did ADP estimate 173,000 jobs added and we got word the same day as their announcement, that the number is really 38,000?
The job report being so deplorable, and yet the American markets erased most of the losses although European markets justified the job report. This is ironical and beyond comprehension. However, the currency markets did give a nod to the job market with USD weakening more than expected. To me, this is a big confusion . The equity markets have proved too high to buy but too firm to sell.
FED STATE COUNTY CITY GOVERMENT NEEDS TO CUT COST. WE ONLEY NEED ONE SEATOR FROM EACH STATE FOR A START; AND MUCH MORE. THEN CUT TAXES.