Does lousy growth plus lousy construction spending equal trouble for the U.S. economy? That’s what you have to wonder in light of the latest figures coming out of Washington.
Market Roundup
We learned on Friday that U.S. GDP grew just 1.2% in the second quarter. That was less than half the average forecast of Wall Street “experts.” Not only that, but Q1 GDP growth was revised down to 0.8% from 1.1%.
Private fixed investment plunged at a 3.2% rate, the worst drop in seven years. Companies slashed inventories the most since 2011. Residential investment fell 6.1%, the most since 2010, while government spending dropped 0.9%, the most since 2014.
All told, our economy has grown at an average annual rate of only 2.1% since the Great Recession. That’s the worst for ANY U.S. “expansion” in the post-World War II era.
Things would have been even worse if it weren’t for relatively healthy activity in the construction sector. The industry was a key source of strength from 2009 through 2015, thanks to low interest rates and an explosion in easy lending for real estate acquisition, construction, and development.
But we learned today that construction spending tanked 0.6% in June. That was much worse than the 0.6% increase that economists expected. It also followed a 0.1% decline in May and a 2.9% plunge in April.
We haven’t seen spending fall three months in a row since the period from November 2012 to January 2013. At the same time, construction employment has dropped or stagnated for three straight months. That hasn’t happened in four years. Throw in the fact the ISM manufacturing index dipped to 52.6 in July from 53.2 in June, and you can see why I continue to maintain we’re in a pre-recessionary environment.
|
|
| A relatively cautious stance is warranted. |
It remains to be seen if hopes for more central bank funny money or fiscal stimulus can win out in the battle against lousy data. But stocks have generally been treading water since the big move in July, while economically sensitive commodities like crude oil are tumbling again. So I think a relatively cautious stance is warranted.
Of course, I’d love to hear your take, too. Should we be worried about the U.S. economy … or sanguine? Will the stock market ultimately “care” about numbers like these, or is it all about central bank action at this point? What kinds of companies are you looking to buy or sell here, and why? Hit up the comment section to share your thoughts.
Until next time,
Mike
|
Bargain-basement interest rates, the investment prospects of gold, and out-of-control bankers: These are just a few topics you’ve been discussing online recently.
Reader Justin weighed in on interest rates, saying: “These ultra-low interest rates are doing massive structural damage to our economy by suppressing the multiplier effect. Money isn’t ‘working’ anymore. Instead, it is going toward risky speculation. It is wealth destruction without a crash.
“Japan adopted these policies decades ago, and it hasn’t gotten them out of their economic rut. There is overwhelming evidence that these policies are not working, or are doing damage, yet the central bankers insist on continuing them. I predict that someday, somebody will win a Nobel Prize for Economics by proving how it isn’t working in mathematical terms. Until then, what a mess we’re in!”
Reader David W. shared this observation on what low rates are doing to pensions: “The total shortfall in defined benefit pensions is so large that contributions cannot make up the difference. Beneficiaries are so many and so well-protected by state constitutions and organizations that it’s virtually impossible to make any meaningful reductions in promised benefits.
“Our only hope is exceptional growth in the economy. We must dump every rule and growth-constricting regulation now.”
Reader Gene added: “There is no excuse for the policies of the Federal Reserve since 2007. I see their massive money printing and next-to-zero interest rates as a case of stupidity. Plain and simple. You can also see it as a case of taking care of the large government debt at the expense of the little savers who worked for years to accumulate savings only to be disappointed with low rates.”
With regards to bank executives and all the recent settlements and charges of wrongdoing, Reader Chuck B. said: “When will American bankers start serving prison terms for their transgressions against customers, and, more importantly, paying back some of what they took from those customers?”
And on the topic of gold, Reader Robert C. said: “I am a firm believer that we, as well as the rest of the world, should return to the gold standard. Since the Fed opened for business, we have lost over 90% of our purchasing power. Inflation on a cumulative basis over 102 years has gone up by 2,200%.
“The floating-rate fiat system is the root of all evil, because governments continue to devalue. It is the working poor and middle class that suffer the most. Throughout history, when governments refuse to address their structural problems, they take the easy way out and devalue. The gold standard would force all governments in the world to live within their means.”
Thank you for sharing your thoughts in these volatile times. And if you haven’t already weighed in, be sure to take advantage of the comment section below.
|
The Initial Public Offering (IPO) business just isn’t what it used to be, what with 2016 likely to be the slowest year since 2009. Only 55 U.S. IPOs have gotten out of the gate, compared with 121 in 2015 and 180 in 2014, per Dealogic. Total dollars raised are down a whopping 70% from 2014.
Uber is giving up on its expansionary ambitions in China, agreeing to sell its Chinese business to competitor Didi Chuxing. It had been spending tens of millions of dollars each month to compete there, and investors reportedly pressured the company to stem the bleeding and focus its efforts elsewhere.
Russia lost an Mi-8 transport helicopter to enemy fire in Syria, raising that country’s death toll to 18. The country is backing embattled Syrian leader Bashar al-Assad with weapons, air support, and other aid in his fight with various rebel groups.
The major telecom companies are increasingly looking to new businesses to generate sales and earnings growth. AT&T (T) bought DirecTV a few quarters ago to broaden its business, and Verizon Communications (VZ) just said it would buy Fleetmatics Group (FLTX) for $2.4 billion. The deal will add Fleetmatics’ vehicle-tracking operations to the mix. Verizon also recently agreed to buy web assets from Yahoo! (YHOO) for $4.8 billion.
What do you think of Uber’s capitulatory move in China? The collapse in IPO volume? Or the latest moves by telecom giants AT&T and Verizon? Let me know here at the website when you have a minute.
Until next time,
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.
{ 31 comments }
Calm before the storm, maybe? Wasn’t the Summer of 1928 like this summer? The markets were flat but investors insisting upon growth in yields pushed the markets off the cliff. At least that is what I recall. I also think that the Summer of 1932 was very similar and the Fed’s stupidity put FDR in office. Will this be any different or will this be another verse in the song that Mark Twain said rhymes with the passage of time.
Sometimes you have to wonder what this
says in regards to today’s news letter:
The Tower of Babel was huge and got
destroyed. The Twin Towers were huge
and got destroyed. The Titanic was huge
you see the point here I’m sure. Hugeness
is not power without liabilities. Where this
unseen rule comes from is debatable but,
what is important here is monopolies
become huge and so does the danger
of the Black Swanns. I’m just saying…
Mises would say that the real economy is down to the last brick or pool of real savings.
i love your news letter.i would like to get it all the time..thank you rose harris
Not only is construction declining, but so is manufacturing. That means lower earnings for many wage dependent people. In turn, stores and on-line sellers will see lower earnings as people max out credit. We already see auto makers planning to cut back production, as sales decline. The only reason for stocks to rise, is because of foreign money flooding the only rising world markets. How long can those markets continue rising? A Philadelphia Fed index that has unfailingly indicated Recession for quite some years has just fallen below the critical level. Look out below!
My wife and I have been cutting back on expenses for months We are looking for ways to reduce all expenses and spend little to nothing Run our cars 250 to 300,000 miles Pay house off in a few months. Trying not to waste food Buying little bit no clothing Although we can afford to do whatever we want We are getting prepared for a total global economic collapse which is imminent
Interesting fact eight years of the Obama Administration and not one year of 3% or over GDP Growth . Does anyone believe it would be any different under a Clinton administration that wants to raise taxes to redistribute the Wealth even Further ????? I think Trump could easily Trump 3% with his pro growth plan !
But do you really want a President who preaches division and social unrest, and who seems ruled by emotion in his decisions. Who has filed bankruptcy 4 times, to stiff his debtors. He would likely stiff you, and you and you, also. Not that Clinton is any better. She is a typical politician, who blames errors on someone else and extorts (Extortion: Demanding money under threat of doing harm) bucks from every taxpayer to benefit her own ideas (ideas?). That leaves only Gary Johnson as a perhaps reasonable successor to Obama. Give him a serious look.
The only thing about Trump that worries me is his potential to cause friction with foreign nations. If he was smart, he should put together a group of experts in all the areas he is not familiar with, and have them outline a plan to accomplish his objectives. And he should promise to implement those plans to assure us that he is serious about improving our Country! We sure don’t need more of the same of the last eight years!!!
Since the FED raised short term interest rates back in December of last year the economy and the job market have slowed down dramatically. Still, all they keep taking about is the timing of the next rate hike. If things continue the way they have, a reverse will be in order. Let us hope that it does not get the that point, since they will be very reluctant to admit their initial mistake.
I think Trumps Lower corporate Taxes and lower regulations on energy such as coal fired plants could easily bring back jobs and GDP Growth of over 3% !
But lower taxes mean even higher national debt, unless dozens of programs are also cut. Do you really think even Republican congressmen are going to vote to seriously reduce programs that almost every American has come to depend on? Think again!
Chuck
This is a hard one as many have come to accept that living with non-repayable debt is acceptable. Someone has to shake this tree of dependency and help rebuild the economy. Do we have an easy choice in the two front runners? No we don’t, but Hillary won’t bring change or improvement.
theres plenty of worthless govt. programs out there lets start by getting rid of the free cell phones for everyone on and now barack obama gave everyone on food stamps high speed internet service , all these programs do is bleed the middle class dry
Should we be worried about the U.S. economy … or sanguine? Worried, but I am thinking we won’t have to pay the piper until after the elections or even into 2017. If Trump wins, that could be a Black Swan event given his lack of discipline and temperament. I would “sell everything and go short” if he won.
Will the stock market ultimately “care†about numbers like these, or is it all about central bank action at this point? Yes, of course, the numbers will actually mean something, but as long as the central banks “seem” to be stabilizing the markets and the financial institutions, the markets will probably go up slightly or go sideways.
What kinds of companies are you looking to buy or sell here, and why? Beside my significant (for me) investment in a silver/goal streaming company, I have been selecting what I think are strong corporations with decent dividend payouts. Once subgroup I’ve selected after Brexit have been investment banking advisory firms that advise clients on M&A, recapitalization and restructuring and other financial matters. The turmoil in the capital and corporate markets for the foreseeable future should be fertile territory for their expertise.
Both my regular and IRA have done well this year, so I’ll continue doing what I’m doing until the financial markets show me it’s time to alter my strategies. I have made some investments that didn’t work out, but tight limits have gotten me out and on to other equity selections. With this market, I am not inclined to ride out a downturn of any significance in a stock. I don’t invest in either the bonds or currency markets.
I agree about a Trump win as a Black Swan, tasmica – it seems highly unlikely – but a Clinton win means a continuation of the Obama blahs, and more bucks for the .01%, who have run things about into the ground in the current admin.
It seems that the choices are Trump who will cut holes in the bottom of the ship to let the water out or Clinton who will continue to increase the gunnels to stay above the rising water. Neither will fix the gaping holes in the ship.
In Monoply when all the money goes to one person, the game is over. This is where our economy stands right now. But in Monoply when the game ends the money is redistributed and the game starts all over again. The government has to get money into the hands of the people to restart the game. If the government doesn’t do it soon the game ends and the second great depression begins. It’s that simple !
Good analogy, Les! Even if one person doesn’t control all the money, a tiny group do. Can’t they see what their operations are doing to everyone else? I guess they don’t care, and that will breed revolution. Late 18th Century France was a good example of what can happen.
How does this compare to other late-stage scenarios?
It is possible that as the economy’s troubles develop, money pursues a flight to safety strategy – further depressing long-term interest rates – even if the Fed raises short-term rates. Blue Chip stocks will follow suit. The result could be higher equity prices.
A year and a half ago, it looked like we found a top. A year ago, it looked like we were making a rounded top. Six months ago, it looked like we were making a bigger rounded top. Now, I’m in the ‘something else must be happening’ camp.
How are tax withholdings doing? Everybody is always looking at the spending side, all of these economic activity indicators, but how much money is going into people’s pockets? Tax withholdings are a good indicator, but nobody discusses it.
In general, maybe show some charts sometimes – with different time spans as well. I plot 1 yr, 2 yr, 4 yr, 8 yr charts every week for my own analysis.
I just read that David Stockman, former budget director under Reagan, calculates that since the beginning of this century, the average American has a 40% lower standard of living, when factoring in the increased costs of living. Think about it: a 40% loss of living standard in just 16 years! Can revolution be very far distant? The trouble is, no one seems to know what system to replace the current system with. Anarchy, perhaps? That will only last until some strong figure takes control – you know what happens then.
This is the same David Stockman that admitted the tax code changes initiated by Reagan was a Trojan horse designed to have the middle class pay more in taxes and to lower taxes on the country’s affluent. It worked as planned!!!! But it also triggered decades long shift of income distribution to the top 1-2%. We now have an even worse distribution of wealth than that existed in the late 1920’s. Hopefully, with a more populist mood in the country, some or most of the those tax codes changes can be undone and permit a reversal of how income/wealth is distributed. For a country built on a 70% consumption rate, taking money away from the bulk of the consumers seems doomed to create some of the issues we now have. It is doubtful Trump would reverse the problem, as he calls for fewer tax rates which would permit the wealthy to keep even more of their income….and his trade “principles” seem likely to cause inflation and economic disruptions. Clinton is much more likely to shift sources of federal revenue to the people who have benefited from these last 30 years. I realize that without a change in the majority party in the HoR and Senate nothing positive will happen…as compromise to the GOP is a foul word and they have an allegiance to the trickle down method of taxation….so we will probably drift toward a stagnation future.
The 1% have been moving US manufacturing to China and elsewhere for the past several years, leaving the rest of America with less income and therefore less spending. The end result will be that there will be great crash.
How is there to be growth when there is nothing to support it at the bottom? Remember how Romney made his money even just after the 2012 elections? The equipment was removed from American factories and sent to China to continue production there. Yes, the labor was cheaper there, but wasn’t he forgetting what Henry Ford taught us? He paid his workers well so that they could afford to buy his cars. Where is this kind of thinking today?
I am pessimistic about the American economy today because the leadership in power does not seem realise that people must have a source of income to help themselves and provide a trickle up for the everyone. Eisenhower understood that, but the present day Congress does not. They have shown to their satisfaction that the Obama presidency has not been very productive, forgetting that they have thereby shown that they are less than productive and the entire American people is suffering because of them. One can only hope that the electorate will throw them all out and elect people who will DO something.
I agree with much of what you wrote….but I would add that the slow recovery from the near economic collapse Obama found as he started his presidency was, in part, slowed even more by the obstruction of Congress and refusal to approve stimulus and employment bills. They even vetoed a bill aimed at employing returning veterans, because as Mitch McConnell said, they didn’t want to give Obama a victory. “Throwing them all out” sounds enticing, but the fact that the vast majority of Congressional Districts are so gerrymandered in GOP dominated states and the nation is so polarized, it seems little positive change in the composition of the HoR can be expected. Thus, compromise and genuine negotiations to pass useful legislation is not likely if Clinton becomes president. Sure would like to be surprised, but I’m won’t go into the elections expecting a dramatic change in the current deadlocked Congress.
Steven
The periods you described 1929 & 1932 were affected by the gold standard. I’m not sure if economies and currencies based on a gold standard and the fiat currencies today are comparable.
If you think FDR was a bad president, Who would’ve been better? Herbert Hoover?
This will be known as Bernanke’s grand experiment. The mother of all bubbles is the result to massive liquidity going to speculations in the US $ assets. Financial engineering are keeping stocks and bonds in the US at bubble levels. You have been talking about it from day one. There is not alternative to the coming collapse of financial systems.
The party establishments are the problem. The corporate lobbies and contributions are the problem. What is the solution? The voice of the people. Sorry to say, but this is represented by Donald Trump. Sorry you don’t like to hear it, but he is the bitter medicine needed to get well.
I don’t think that Trump has any real connection to “The People”, and therefore cannot qualify as being their voice or true representative. What he has done is to high jack the Republicsn party and parrot back high volume complaints from The People. He does this at the same time that he hires foreign workers, moves his own factory production oversees, misrepresents his income, uses bankruptcy as a “business tool” and uses every creative tax avoidance tool possible. His promises- at the very least- lack substance. Mostly, they are starting to sound like “carnie rap”. Buyer beware.
Maybe the economy’s not sanguine but behaving pejoratively.
People don’t seem to realize that cutting our highest in the world corporate taxes will bring jobs back and create growth that will benefit the middle class. I have a mental illness and am putting my inheritance into the market up or down. Better than $100k making 0.09 per cent while sitting in banks. I live on my dividends.
If they can’t decide between Trump and Clinton, why don’t they let Obama stay in for another term.