The two most profound changes in the world for our generation have been the advent of the Internet and the explosive growth of the Chinese economy. Today, China’s GDP is equal to about one-half that of the U.S. Only 15 years ago, Chinese’s GDP was only one-tenth that of the U.S. In the fast growing global economy, China is emerging as a major player. The country of over one-billion people has been growing at the accelerated rate of 9% to 10% per annum for almost 10 years now. In Profit Confidential, we regularly comment on the Chinese economy, where we believe it’s headed and how an average investor in North American can partake and even profit on the unprecedented transfer of economic power from the U.S. to China.

More bad economic news…

U.S. retail sales for April rose at the slowest rate of 2012. While the retail sector was expected to continue its torrid pace of consumer spending increases in 2012, this report proves my theory: lack of a real winter (because of much better than usual weather in January and February) on the east coast this year resulted in consumers going out and doing their spring shopping early.

To get the real picture on consumer spending, we need to remove car sales, filling up at the local gas station, and building materials from the retail sales numbers to get core retail sales. Core retail sales came in at 0.1% in April (source: Department of Commerce), well below the consensus economic forecast of 0.3%.

April core retail sales in the U.S. were at their lowest level since December of 2011—a poor sign for the fragile retail sector.

What was the big soft spot in April retail sales? It was weak sales at the clothing stores and at the department stores that weakened the retail sector considerably for April.

Sales at building materials stores in the retail sector also experienced a weak April. Obviously these areas were affected by the warm weather and Easter being moved up to March this year.

Let’s face the facts…

If economic growth was strong and the economic recovery was really taking shape, retail sales would have been stronger in April. Instead, there is no follow-through to that short burst in real sales earlier in the year.

The main problem, as I’ve cited countless times in these pages, is that real disposable income is not increasing. How can consumer spending, which is 70% of gross domestic product (GDP), grow when people’s real purchasing power is falling?

The Home Depot, Inc. (NYSE/HD), one of the key components of the retail sector, recently reported weaker than expected earnings because, despite a strong February and March due to warm weather, sales fell off more than expected in the month of April.

Do Home Depot’s financial results suggest that consumer spending will be weaker moving forward? I think they do.

With the unemployment rate remaining relatively high and real discretionary spending not rising, strong retail sales reported in February and March of this year were just an anomaly due to the warm weather.

Now that spring is here and the average consumer is worse off than he/she was before the year started, the retail sector will struggle.

Signs of the weakening U.S. economy are evident everywhere I look (see: U.S. Durable Orders Post Biggest Drop in Three Years). Again, consumer spending makes up 70% of U.S. GDP. And if consumers are not spending, GDP growth will suffer.

Michael’s Personal Notes:

When North America was coming out of its financial crisis, we were fortunate that the emerging markets—especially the growth in the Chinese economy and Indian economy—helped provide some of the growth that the world so desperately needed at the time.

A few short years later, with Europe in a recession and the U.S. economy not growing very much at all, the dependence on Asia has changed. The fact is that the Chinese economy and the economy of India are slowing measurably.

In India, manufacturing production in March 2012 fell 4.4% from a year earlier. This slowdown is blamed squarely on the recession in Europe.

What is more alarming is that the “investment indicator of capital goods output,” which measures how future investment in manufacturing is looking, fell 21% in India from last year!

If this is not an economic slowdown, I don’t know what is.

The central bank of India had forecast 7.6% growth for the coming year, but that will have to be taken down significantly in light of these numbers. The central bank of India is looking for ways to stop the economic slowdown, including lowering interest rates.

While not contracting, the Chinese economy is slowing considerably. In April, China’s industrial output slowed to its lowest level since 2009!

In April, the employment level in the manufacturing sector, which is so important to the Chinese economy, fell at the fastest rate since 2009!

The month-over-month increase in industrial output between March and April this year in the Chinese economy was 0.35%, which was the lowest growth rate ever recorded since the index was created decades ago!

In response to the economic slowdown, the People’s Bank of China reduced its banks’ reserve requirements (equivalent to cutting interest rates here in the U.S.) by one-half-of-a-percent. The People’s Bank of China sees further downside risks to the Chinese economy, which means it could cut rates further a month from now.

There is no doubt that the Chinese economy is feeling the effects of the recession in Europe in terms of its exports (as is evident by the industrial and manufacturing numbers). Retail sales in China grew at a slower pace than expected in April, further adding to the evidence of an economic slowdown in the Chinese economy.

While it helped tremendously to have the Chinese economy and Indian economy as great sources of growth when the U.S. financial crisis hit, they will not be there to support the global economy on the next leg of the downturn. (Also see: World Economic Growth Moving From Slowdown to Contraction.)

Where the Market Stands; Where it’s Headed:

Update and reiteration from yesterday…

Last fall, I circulated a report that stated the stock market would start to crash in the U.S. on or about April 13, 2012. It was entitled “Next Market Crash Starts April 13, 2012.”

I was exactly two week early. From the end of April to yesterday, the Dow Jones Industrial Average has collapsed 896 points, or about seven percent.

But we should not be afraid. Money printing will save the day again.

Wednesday of this week, we got news that several members of the Federal Open Market Committee (the Federal Reserve) said that more monetary easing (money printing) may be required. As I have been predicting for months, as soon as the stock market started to pull back, QE3 would be on to the table again.

What a concept. Stock market and economy start to go down; we just print more money to get them both moving again. How long can this process go on for? How long can the Fed fight the natural forces of a secular bull market?

The bear market rally in stocks that started in March of 2009 is getting close to the end of its cycle. I have been warning my readers that the limited upside for the market may not be worth the risk.

What He Said:

The year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

When North America was coming out of its financial crisis, we were fortunate that the emerging markets—especially the growth in the Chinese economy and Indian economy—helped provide some of the growth that the world so desperately needed at the time.

A few short years later, with Europe in a recession and the U.S. economy not growing very much at all, the dependence on Asia has changed. The fact is that the Chinese economy and the economy of India are slowing measurably.

In India, manufacturing production in March 2012 fell 4.4% from a year earlier. This slowdown is blamed squarely on the recession in Europe.

What is more alarming is that the “investment indicator of capital goods output,” which measures how future investment in manufacturing is looking, fell 21% in India from last year!

If this is not an economic slowdown, I don’t know what is.

The central bank of India had forecast 7.6% growth for the coming year, but that will have to be taken down significantly in light of these numbers. The central bank of India is looking for ways to stop the economic slowdown, including lowering interest rates.

While not contracting, the Chinese economy is slowing considerably. In April, China’s industrial output slowed to its lowest level since 2009!

In April, the employment level in the manufacturing sector, which is so important to the Chinese economy, fell at the fastest rate since 2009!

The month-over-month increase in industrial output between March and April this year in the Chinese economy was 0.35%, which was the lowest growth rate ever recorded since the index was created decades ago!

In response to the economic slowdown, the People’s Bank of China reduced its banks’ reserve requirements (equivalent to cutting interest rates here in the U.S.) by one-half-of-a-percent. The People’s Bank of China sees further downside risks to the Chinese economy, which means it could cut rates further a month from now.

There is no doubt that the Chinese economy is feeling the effects of the recession in Europe in terms of its exports (as is evident by the industrial and manufacturing numbers). Retail sales in China grew at a slower pace than expected in April, further adding to the evidence of an economic slowdown in the Chinese economy.

While it helped tremendously to have the Chinese economy and Indian economy as great sources of growth when the U.S. financial crisis hit, they will not be there to support the global economy on the next leg of the downturn. (Also see: World Economic Growth Moving From Slowdown to Contraction.)

Where the Market Stands; Where it’s Headed:

Update and reiteration from yesterday…

Last fall, I circulated a report that stated the stock market would start to crash in the U.S. on or about April 13, 2012. It was entitled “Next Market Crash Starts April 13, 2012.”

I was exactly two week early. From the end of April to yesterday, the Dow Jones Industrial Average has collapsed 896 points, or about seven percent.

But we should not be afraid. Money printing will save the day again.

Wednesday of this week, we got news that several members of the Federal Open Market Committee (the Federal Reserve) said that more monetary easing (money printing) may be required. As I have been predicting for months, as soon as the stock market started to pull back, QE3 would be on to the table again.

What a concept. Stock market and economy start to go down; we just print more money to get them both moving again. How long can this process go on for? How long can the Fed fight the natural forces of a secular bull market?

The bear market rally in stocks that started in March of 2009 is getting close to the end of its cycle. I have been warning my readers that the limited upside for the market may not be worth the risk.

What He Said:

The year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

The Chinese economy has accelerated at a high level for a number of years. While China’s growth might slow down in the short term, the long-term forecasts for the Chinese economy are extremely bullish. Many firms are hoping for an increase in corporate earnings by expanding sales and production within the Chinese economy. While most Americans still think of the Chinese economy as production only, meaning cheap labor, several corporations see more to the Chinese economy than that simple notion.

Ford Motor Company (NYSE/F) has just announced a $5.0-billion expansion in the Chinese economy. This includes a massive increase in production, as many would expect, but it is also expanding its dealerships throughout Asia. Ford, along with many corporations, sees the Chinese economy as the great frontier for corporate earnings growth over the next several decades. By completion of the fifth factory in 2015, Ford’s total capacity of production plants will be to build 1.2 million cars in China.

Ford isn’t the only carmaker looking to China for increased corporate earnings growth. General Motors Company (NYSE/GM) has been active in the Chinese economy and has a larger share of the market with its head start. GM is also looking to continue its expansion with additional joint venture partners and more production facilities to take advantage of the continued Chinese growth over the next two decades.

While GM is number one in overall car sales for non-Chinese automakers, Volkswagen Aktiengesellschaft (Pink Sheets/VLKAY) is also a large player in the Chinese economy, with additional production also set to take place over the next few years. As Ford stated in its release regarding new production facilities, it expects China’s growth in car sales to be 70% larger by 2020. With forecasts of car sales estimated to grow at that point to over 35 million units, as estimated by LMC automotive, compared to the current pace in the U.S. of 14 million units, it is evident that the Chinese economy will be the place for additional corporate earnings growth for many car manufacturers.

But the car market for the Chinese economy isn’t only in the low-end, cheaper cars. The high-end market is very active, adding to profit margins and corporate earnings for several firms. Nissan unveiled that it will be producing its luxury brand, “Infinity,” in 2014. It, too, will be ramping up production of vehicles locally for the Chinese economy, as authorities enact a 25% tariff on imported cars. Nissan’s Infinity brand will join a crowded luxury car market with “BMW”, “Mercedes-Benz” and “Audi.”

While the Chinese economy is certainly slowing, the long-term potential is very strong. Current reports of first-quarter auto sales show a slowing Chinese economy, with a decrease of 3.4% in total automobile sales compared to 2011. The trend is obviously showing that the Chinese economy is slowing down. But the long-term potential, if one were to look out over one to two decades is still quite strong. Many auto manufacturers are looking for any market to grow corporate earnings now that Europe is in a deep recession and possibly getting worse. While the Chinese economy is certainly slowing down, carmakers believe that they have better potential for corporate earnings growth there than they do in Europe or the U.S.

For some time I have been saying that those people who were prudent, who worked hard all their lives and saved their money, are being punished by historically low interest rates, which are below the inflation rate.

Clearly, artificially low interest rates below the inflation rate help those who are in debt, including the U.S. government, because their interest costs are greatly reduced.

Savers include those retirees who saved prudently all their lives and are now relying on interest income from their savings to help fund their retirement. Savers can also be those of working age who have reasonable amounts of debt, so that they are capable of saving money for retirement or for a large purchase. They, too, are depending on the interest earned on their savings to help finance their retirement or a large purchase.

The problem is that, with interest rates at historic lows, savers who do not want risk and who invest in bank CDs or GICs are earning next to nothing on their savings. To compound the problem, savers are earning interest that is below the inflation rate, which not only wipes out the little interest they earn, but also eats into their savings, because their savings have not kept up with the inflation rate. How can the U.S. experience an economic recovery in such an environment?

A recent study by Haver Analytics and money manager Gluskin Sheff have estimated that, since 2008, savers in the U.S. economy have lost over $1.0 trillion in interest income during the economic recovery. This study takes the difference between the low interest rates of the last few years of this economic recovery and the average interest rates of the last 50 years: between five percent and six percent here in the U.S.

Taking into consideration the inflation rate, they estimate that savers are losing $400 billion a year in interest income. As long as interest rates continue to remain at this level, which the Federal Reserve has said will be the case until the end of 2014, this loss of income will further hamper the economic recovery.

Not only are savers losing out on this interest income, but also the U.S. economy and the economic recovery. It is almost certain that a portion of the $1.0 trillion in lost interest income would have found a way back into the economy, which in turn boosts the economic recovery.

Trillions of dollars in money has been printed; but to this point, the U.S.economic recovery barely has a pulse. If interest rates had remained at reasonable levels—above the inflation rate—it is possible that that one trillion in the hands of savers might have been more effective at aiding the U.S. economic recovery.

The combination of falling real personal incomes and the loss in interest income now quantified by this study leaves little doubt as to why the U.S. economic recovery cannot get back up on its feet.

With the consumer being 70% of GDP—the key component to an economic recovery—instead of the U.S. government making the consumer wealthier so they can spend, they are making the consumer poorer. With this backdrop, the economic recovery will most assuredly fall flat on its face. If that is the case, dear reader, then this stock market rally could be the next thing to fall flat on its face. (Also see: The Missing Economic Recovery.)

Michael’s Personal Notes:

Where’s quantitative easing (QE) for the jobless?

A recent survey of manufacturers in the U.S. found that at least 600,000 jobs are going unfilled due to a lack of technical skills (source: Deloitte). This is happening while there are 12.7 million people looking for jobs in the U.S. jobs market (source: Bureau of Labor Statistics).

Boeing is confronting a large retirement issue, where 28% of its 33,000 machinists are entering the retirement stage of their lives. Young people are lacking the technical skills required to perform this work in the U.S. jobs market.

One transportation firm, as it usually does, visited its local government jobs market center to find the 100 drivers it needs for the upcoming summer moving season. Federal money previously paid the $4,000 for the classes so that those unemployed who were interested in being truck drivers would be able to obtain their commercial licenses without incurring the financial burden. Unfortunately, this program had to be eliminated due to lack of funding, so the company is having a difficult time finding drivers in this jobs market, because many unemployed can’t afford the $4,000 fee for the program.

In Seattle, the seven jobs market centers have enough funds to train roughly 5,400 unemployed, while the city currently has 120,000 unemployed (source: New York Times). In Dallas, the city has 23,500 people who have lost their jobs, but only enough federal money at its jobs market centers to train 43 unemployed people.

In 2000, when the unemployment rate was four percent, the federal government was spending more than $2.1 billion a year for jobs market training. In 2012, with the unemployment rate more than doubled, at 8.2%, jobs market training programs have dropped 57% to $1.2 billion (source: New York Times).

These numbers are just shocking. In his latest budget proposal, President Obama is requesting $280 billion dollars a year more for jobs market training, but even at that, the total federal funding would come to just $1.48 billion, well short of the $2.1 billion spent in 2000 in the jobs market.

The Workforce Development Council found that every dollar spent on training dislocated workers in the 2009 jobs market returned $8.70 to the local economy. This makes sense, because the unemployed person finds work in the jobs market after being trained. That person then is able to go out and spend. This money spent filters back into the economy.

The other aspect of training and getting the unemployed back to work is that of course it means no taxpayer unemployment check and lower health costs. A person who feels better about him/herself because he/she is employed and able to support his/her family reduces costs to our healthcare system.

There has been a lot of money printing that has found its way to the large U.S. banks in the hopes of turning this economy around. According to the Workforce Development Council, instead of taxpayers helping the banks, the investment of one dollar to return $8.70 sounds like the better investment. (Also see: Pathetic Job Numbers Expose Fake Economic Recovery.)

Where the Market Stands; Where it’s Headed:

This morning, we received the news that China’s economy, now the world’s second largest, grew at only 8.1% in the first quarter of 2012—its weakest quarterly growth rate since the second quarter of 2009.

A softening Chinese economy likely means China’s central bank will loosen its monetary policy. If easier lending requirements in China do not keep its economy on “soft landing” flight, then the world will be in for trouble.

While I believe that the stock market rally that started in March of 2009 is getting close to the top, I have been reluctant to throw the towel in just yet. I believe a form of QE3 is still coming and I believe the Fed and government will fight a downturn in the stock market tooth and nail. But, in the end, the natural forces of the bear market will be too much to overcome.

What He Said:

“For the economy, the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.

Where’s quantitative easing (QE) for the jobless?

A recent survey of manufacturers in the U.S. found that at least 600,000 jobs are going unfilled due to a lack of technical skills (source: Deloitte). This is happening while there are 12.7 million people looking for jobs in the U.S. jobs market (source: Bureau of Labor Statistics).

Boeing is confronting a large retirement issue, where 28% of its 33,000 machinists are entering the retirement stage of their lives. Young people are lacking the technical skills required to perform this work in the U.S. jobs market.

One transportation firm, as it usually does, visited its local government jobs market center to find the 100 drivers it needs for the upcoming summer moving season. Federal money previously paid the $4,000 for the classes so that those unemployed who were interested in being truck drivers would be able to obtain their commercial licenses without incurring the financial burden. Unfortunately, this program had to be eliminated due to lack of funding, so the company is having a difficult time finding drivers in this jobs market, because many unemployed can’t afford the $4,000 fee for the program.

In Seattle, the seven jobs market centers have enough funds to train roughly 5,400 unemployed, while the city currently has 120,000 unemployed (source: New York Times). In Dallas, the city has 23,500 people who have lost their jobs, but only enough federal money at its jobs market centers to train 43 unemployed people.

In 2000, when the unemployment rate was four percent, the federal government was spending more than $2.1 billion a year for jobs market training. In 2012, with the unemployment rate more than doubled, at 8.2%, jobs market training programs have dropped 57% to $1.2 billion (source: New York Times).

These numbers are just shocking. In his latest budget proposal, President Obama is requesting $280 billion dollars a year more for jobs market training, but even at that, the total federal funding would come to just $1.48 billion, well short of the $2.1 billion spent in 2000 in the jobs market.

The Workforce Development Council found that every dollar spent on training dislocated workers in the 2009 jobs market returned $8.70 to the local economy. This makes sense, because the unemployed person finds work in the jobs market after being trained. That person then is able to go out and spend. This money spent filters back into the economy.

The other aspect of training and getting the unemployed back to work is that of course it means no taxpayer unemployment check and lower health costs. A person who feels better about him/herself because he/she is employed and able to support his/her family reduces costs to our healthcare system.

There has been a lot of money printing that has found its way to the large U.S. banks in the hopes of turning this economy around. According to the Workforce Development Council, instead of taxpayers helping the banks, the investment of one dollar to return $8.70 sounds like the better investment. (Also see: Pathetic Job Numbers Expose Fake Economic Recovery.)

Where the Market Stands; Where it’s Headed:

This morning, we received the news that China’s economy, now the world’s second largest, grew at only 8.1% in the first quarter of 2012—its weakest quarterly growth rate since the second quarter of 2009.

A softening Chinese economy likely means China’s central bank will loosen its monetary policy. If easier lending requirements in China do not keep its economy on “soft landing” flight, then the world will be in for trouble.

While I believe that the stock market rally that started in March of 2009 is getting close to the top, I have been reluctant to throw the towel in just yet. I believe a form of QE3 is still coming and I believe the Fed and government will fight a downturn in the stock market tooth and nail. But, in the end, the natural forces of the bear market will be too much to overcome.

What He Said:

“For the economy, the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like ‘drunkards’ during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.