Comstock Partners, Inc.May 31, 2012
More Evidence Of The Economic Slowdown
Reinforcing our observations in recent comments, the latest batch of economic statistics indicates an economy that is slowing down significantly. Today alone we have seen disappointments in first quarter GDP, weekly initial unemployment claims, the Chicago ISM and the ADP monthly payroll number. This follows on the heels of laggard recent numbers for pending home sales and core capital goods orders as well as a host of other downgrades that we have mentioned previously.
First quarter annualized GDP growth was revised down to 1.9% from a previously reported 2.2%. Consumer spending increased by a tepid 2.7% despite an increase of only 0.4% in real disposable income. This was accomplished by a reduction of the savings rate from 4.2% to 3.6% as debt-laden consumers were forced to dip into savings to offset a lack of income, a process that has been going on for almost three years. Notably, the post-credit crisis savings rate peaked at 6.2% in second quarter of 2009 and has been gradually falling ever since.
Initial unemployment claims for the week ended May 26th climbed to 383,000 from 368,000 on April 12th and the low point of 361,000 on February 5th while the ADP report for private payroll employment was a disappointing 133,000. Taken together, the numbers hint at a labor market that that is weakening once again.
Perhaps the biggest shocker, though, was the Chicago ISM, which plunged to 52.7 from 56.3 in April and 62.2 in March and 64.0 in February. The three month drop was the largest since the financial crisis in late 2008 and the second largest since the early 1980s. Historically, three consecutive monthly declines have usually pointed to a recession ahead.
Other recent reports indicated that pending home sales for April were the lowest since December and that core capital goods orders, a leading indicator of capital expenditures, were down 1.9% in April following a drop of 2.2% in March. It is also notable that the ECRI leading indicator is 4.62 points under a year earlier, a decline that has almost always been followed by a recession.
The underlying weakness of the economy is a debt-strapped consumer with income that is barely rising. Only a drop in the savings rate to a paltry 3.6% has kept both the consumer and the economy growing at even the current tepid rate. It seems obvious to us that this cannot continue, and that with consumers in no position to spend, businesses have no reason to do so as well.
Evidence that the global economy is slowing is even stronger than in the U.S. The debt crisis in Europe seems to get more convoluted every day as the "best and the brightest" seem to be grasping at straws with new proposals almost every day. Whatever the outcome, it seems certain that Europe is entering a recession if it is not already in one. At the same time, China, India and Brazil, the nations that have accounted for the lion's share of recent global growth, are all slowing down substantially. Although the "experts" continually talk about decoupling, there is actually a high correlation between the economic growth rates of the world's largest economies.
The stock market is only in the first stage of appreciating the gravity of the situation. The uptrend in the S&P 500 was broken when it dropped through 1357 and then 1340. In our view the market is headed much lower, although the hope of investors that central banks can halt the decline will undoubtedly lead to intermittent rallies that are doomed to fail.