Economic Analysis
The rise of the Internet has created an abundance of easily accessible economic information. Unfortunately, this has made it difficult for investors to understand, digest, and even evaluate. Where, then, can investors turn for objective economic analysis, market research, and breaking fiscal news that affects both Wall Street and Main Street?
Economic analysis means looking at the interconnected effects of global economic events. These events can be as major as geopolitical tensions, elections, corporate earnings, housing markets, consumer sentiment, and rising unemployment rates—to seemingly innocuous news stories, including mergers and acquisitions, crude oil inventories, auto loans, birth rates, and retiring Baby Boomers.
In 2001, Michael Lombardi started his famous daily economic newsletter Profit Confidential. Written by Lombardi Financial editors who have been offering stock market guidance to Lombardi customers for years, Profit Confidential provides a macro-picture on where the stock market is headed, what sectors are hot, and what sectors to avoid.
Over the years, Michael’s financial commentary and the accuracy of his economic predictions have garnered him global attention and the confidence of over one million investors in more than 140 countries.
When the U.S. economy was on the verge of collapse after the financial crisis of 2008, the Federal Reserve came to the rescue. The central bank provided the financial system with quantitative easing (QE)—it printed money and bought bad debt from the big banks. As a result, the Federal Reserve’s balance sheet has grown by almost $2.0 trillion—200% in less than five years. Where did the money come from, and how does it affect the buying power of the average American?
The eurozone is struggling to get out of a debt crisis that has been helping weigh down the global economy. Germany and France, the go-to countries for economic growth and stability in the eurozone, are beginning to experience retractions and may not be able to prevent the region from slipping into a recession. The eurozone unemployment rate reached a record high of 11.7% in October 2012, up from 11.6% in September. There are 18.7 million people unemployed in the region, with Spain and Greece’s unemployment rates both exceeding 25%. (Source: Eurostat, November 30, 2012.)
What does this mean for the eurozone? How will it impact the United States? Or, affect the Chinese economy?
At the same time, it’s important that economic analysis takes an ongoing look at domestic policies. For example, cities like Vallejo, Mammoth Lakes, Stockton, and San Bernardino have already defaulted on their municipal bonds. What caused them to declare bankruptcy, and how does it affect the everyday investor and the overall health of the U.S. economy?
The global economy is constantly going through changes. We currently live in a world where one country is connected with the other. It doesn’t really matter anymore how far or close economies are to each other.
That’s why in-depth macro- and micro-economic analysis is more important than ever. It helps investors see the world from different perspectives and helps uncover opportunities to balance, diversify, and grow stock portfolios.
China’s economic situation, the information age, an end to the 30-year down cycle in interest rates, the credit crisis , the coming debt crisis in America, the eurozone crisis—these are only a few of the economic events occurring in the global economy. That’s what drives Profit Confidential. We take the economic information churned out daily, analyze it, and deliver understandable, even fun-to-read, economic analysis to our readers each day.
U.S. GDP to Suddenly Turn Negative in First Quarter of 2013?
By Michael Lombardi, MBA for Profit Confidential
U.S. gross domestic product (GDP) increased by only 0.4% in the fourth quarter of 2012, according to the Bureau of Economic Analysis (BEA). While the mainstream may rejoice in this news, sadly, the increase in GDP was nowhere near the 2012 third-quarter GDP growth—it increased by 3.1% during that quarter. Recent GDP numbers show the U.S. economy is struggling.
The devil resides in the details:
• U.S. government spending and investment decreased by 14.8% in the fourth quarter, compared to an increase of 9.5% in the third quarter of 2012—it held the GDP of the U.S. economy higher in the third quarter.
• Businesses in the U.S. aren’t selling—they’re just piling up their inventories. In the fourth quarter of 2012, private sector inventories caused GDP to decline. Businesses added inventories of $13.3 billion in the fourth quarter.
• In the fourth quarter of 2012, real purchases of goods and services by U.S. residents (no matter where they were produced) were unchanged. In the third quarter, they increased by 2.6% in the U.S. economy. The latest statistics show consumers simply aren’t buying.
• Exports from the U.S. economy decreased by 2.8% in the fourth quarter, compared to an increase of 1.8% in the third quarter. If consumers in the U.S. economy aren’t buying, and businesses aren’t selling to other countries because the eurozone is so depressed, what happens to the profitability of U.S. companies?
In addition to all this, the BEA also stated that in the fourth quarter, the U.S. economy’s GDP increased to a 12-month following total of $15.86 trillion. When I look at this number, the only thing I can think of is the current state of our national debt—which stands above $16.75 trillion and will most likely hit the $17.0-trillion mark soon. Our debt is 107% of our GDP!
Our nation is in deep trouble. This slight increase in GDP in the fourth quarter of 2012 doesn… Read More
Why U.S. GDP Contracted for First Time in 3.5 Years
By Michael Lombardi, MBA for Profit Confidential
(Make sure to read my important comments today about the stock market in “Where the Market Stands; Where it’s Headed” below.)
The U.S. economy, as measured by gross domestic product (GDP), contracted in the fourth quarter of 2012 for the first time in three and a half years. According to the Bureau of Economic Analysis, U.S. GDP “unexpectedly” declined 0.1% in the fourth quarter of 2012 from the third quarter. (Source: Bureau of Economic Analysis, January 30, 2013.) Economists were estimating growth of one percent in the GDP for the fourth quarter of 2012.
If the first quarter of 2013 proves to be weak for GDP again, the U.S. will have technically entered a recession once more.
What’s behind the contraction in GDP? Defense spending took the biggest cut in 40 years. (Source: Associated Press, January 30, 2013.) But there are other troubles brewing.
Sure, government spending declined. In the fourth quarter of 2012, federal government spending declined 15% in the U.S. economy compared to an increase of 9.5% in the third quarter. Defense spending decreased 22.2% in the fourth quarter, compared to the 12.9% increase in the third quarter of 2012.
Looking deeper into the Bureau’s report, we discover:
• Exports of goods and services adjusted for price change from the U.S. economy fell 5.7% in the fourth quarter. In the third quarter of 2012, exports rose 1.7%.
• In the last quarter of 2012, businesses in the U.S. economy produced less than they did in third quarter of 2012. Inventories increased only by $20.0 billion in the fourth quarter, compared to a $60.3 billion increase in the third quarter and $41.4 billion in the second quarter of 2012.
• The output gap of the U.S. economy—the difference between actual output and what the economy can potentially produce—was $885.4 billion in 2012.
Yes, the stock market is rising (see my “Where the Market Stands; Where it’s … Read More
Real Disposable Income, Personal
Savings; Both Breaking Down
By Michael Lombardi, MBA for Profit Confidential
American consumers are the most important factor for the U.S. economy. When consumer spending increases, the U.S. economy grows, as consumer spending accounts for 70.0% of U.S. gross domestic product (GDP). Similarly, when consumer spending pulls back, we experience an economic slowdown.
For consumer spending to keep increasing, the ultimate factor—consumer income—needs to increase. Basic economics suggest that once a person earns more or has some savings, he or she spends more.
Unfortunately, this is not the scenario in the U.S. economy right now. Lack of consumer spending is like an elephant in the room that no one notices. Any further pullback on consumer spending at this point could quickly lead us back into a recession.
In September 2012, the real disposable income in the U.S. decreased by 0.1%. In August 2012, there was a decline of 0.3% in U.S. real disposable income. (Source: Bureau of Economic Analysis, October 29, 2012.)
Meanwhile, the U.S. personal savings rate is also on the decline, down to 3.3% of disposable income in September, compared to 3.7% in August.
For savings, the story doesn’t end here. Contrary to popular belief, since the beginning of the financial crisis, the personal savings rate has been falling—not a good indicator for the U.S. economy. For example, in November of 2008, the savings rate for Americans was 6.5% of their disposable income. Since that peak, savings as a percentage of real disposable income for Americans has fallen more than 49.0%! (Source: Federal Reserve Bank of St. Louis, October 29, 2012.)
The chart below shows the personal savings rate for Americans since the beginning of 2008 to September of this year. You’ll note a clear decline from the peaks in mid-2008.
Copyright Lombardi Publishing Corporation 2012
My skepticism about the economy boils down to this: Americans are earning and saving less, so how can I believe cons… Read More
How Government Spending Really Fuelled Third-quarter U.S. GDP
By Michael Lombardi, MBA for Profit Confidential
According to the Bureau of Economic Analysis (BEA), the U.S. economy grew at an annualized rate of two percent in the third quarter. GDP in the second quarter of 2012 was only 1.3%. (Source: Bureau of Economic Analysis, October 26, 2012.) U.S. GDP in dollar value is on track to increasing to $15.8 trillion this year.
The increase in the GDP is certainly good for the U.S. economy, but why it increased in the third quarter is intriguing.
Here is what happened in the third-quarter GDP that the mainstream media missed:
GDP in the U.S. economy is calculated by looking at specific factors, such as consumption by consumers, government spending, and net imports over exports.
In calculating third-quarter GDP, there was an increase of 9.6% in government spending and investments—in the previous quarter, there was a decrease of 0.2% in government spending and investments. National defense spending increased by 13.0% in the U.S. economy in the third quarter of 2012, compared to a 0.2% decrease in the second quarter.
On the other hand, personal consumption in the U.S. economy increased in the third quarter by a mere two percent. Exports actually fell by 1.6% from an increase of 5.3% in the second quarter, and imports also fell 0.2% in the third quarter from an increase of 2.8% last quarter.
Factories in the U.S. economy are still far from running at full speed. In August, industrial production in the U.S. fell 1.4 % from a rise of 0.7% in July. In September, it increased only 0.4% from the decline in August. (Source: Federal Reserve, October 16, 2012.)
What all this data shows is that the increase in third-quarter GDP was stretched by government spending. The government spent more, and the GDP rose. If you took the increase in government spending out, the GDP wouldn’t look as rosy as it does.
But the government can’t continue to spend at the speed it did in the third quarter.
The U.S. economy is weak; the… Read More
What the Eventual Dismantling of the Eurozone Will Cost the U.S.
By Michael Lombardi, MBA for Profit Confidential
There is no doubt now: the U.S. economy is being highly affected by the global economic slowdown. If you have been listening to financial gurus and the mainstream media saying, “We’ll be alright, we can weather the storm,” take their word at your own risk.
To put things into perspective, we need to know how critical the collapse of the eurozone will be to the U.S. economy, or even just the exit of one country that shares the euro from the eurozone. A recent study by Bertelsmann Stiftung showed that if Greece exits the eurozone, 42 of the top economies in the global economy will have to absorb a loss of 674 billion euros (close to US$1.0 trillion) until 2020. (Source: “Greece’s Withdrawal from the Eurozone Could Cause Global Economic Analysis,” Bertelsmann Stiftung, October 17, 2012.)
If more countries like Spain, Portugal, and Italy exit the eurozone, the losses will be in the trillions (in U.S. dollars) and will create havoc in the global economy. According to this study, if these three countries do exit the eurozone, the U.S. economy will be exposed to a loss of 2.8 trillion euros through to 2020.
This study should be an eye-opener to governments and central banks in the eurozone and the U.S. economy. Scrambling to print more money can only go so far. Maybe it’s about time those in charge come up with a different plan to help the troubled eurozone.
Nothing seems to be changing in the eurozone: Spain continues to play the same game that Ireland played when it needed its bailout; Greece has failed to implement more austerity measures; and Italy says it has no problem.
The U.S. economy had a chance at economic growth after the worst recession since the Great Depression. That chance has gone down the drain now because of the eurozone crisis.
Eventually, I believe we will see the crisis in the eurozone spread from one country to another in rotation. This news should not shock my readers, a… Read More
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