First Double-dip Recession Since 1975

consumer spendingThe U.K. has joined the double-dip recession club in 2012. More members will be dragged into the club; kicking and screaming all along the way.

Officially, a recession is defined as two consecutive quarters of negative gross domestic product (GDP) growth. In the fourth quarter of 2012, the U.K. economy—GDP growth—shrank by 0.3%. In the first quarter of 2012, GDP growth contracted by 0.2% (source: The Telegraph, April 26, 2012).

This is the first double-dip recession the U.K. has experienced since 1975, and the citizens are not too pleased.

Since many countries within the European Union are the U.K.’s main trading partners, one area that brought down the U.K.’s GDP growth was exports to the European Union. From the fourth quarter of 2011 to the first quarter of 2012, exports of goods from the U.K. to the European Union fell 1.2%, while exports to the rest of the world were actually up (source: The Guardian, April 26, 2012).

Year-over-year, from the first quarter of 2011 to the first quarter of 2012, exports to the European Union were down 3.3%, while exports to the rest of the world were slightly higher. As a result, the U.K. manufacturing sector contracted, dragging down GDP growth.

Construction spending and retail sales were also weak in the first quarter of 2012, which illustrated the fact that the citizens of the U.K. were unable to push GDP growth figures higher.

The U.K. is attempting to implement its own version of austerity measures to reduce its level of debt. Now many are asking the government to relax its stance to focus on growth instead in order to help consumers and hopefully spur GDP growth.

Naturally, should GDP growth continue to contract, U.K. citizens would want a further reduction in interest rates and more money printing. Yes, the Federal Reserve is not the only central bank that is printing money in order to boost GDP growth. (Also see: Next European Country to Default: Why it Means More Money Printing.)

However, reducing interest rates and printing more money is an issue, because rapid inflation remains stubbornly high. The latest U.K. Consumer Price Index (CPI) reading came in at 3.5%.

Rising food and clothing prices are the main culprits behind the persistence of rapid inflation in the U.K. The government believes the rapid inflation is transitory and should come down to its two-percent rapid inflation target by the end of the year. Hmm…sounds familiar.

The problem in the U.K., link in the U.S., is that incomes are increasing at rate that is substantially below the inflation rate. In the U.K., inflation-adjusted personal income is falling by 2.4% annually.

With many countries in the eurozone in recession, with the U.K. now in recession, while China’s GDP growth rate is falling at an accelerated rate, the recession “ship” could be headed straight for the shores of the U.S. economy.

Michael’s Personal Notes:

Orders for U.S. durable goods fell 4.2% in March from February’s level, representing the largest falloff in three years (source: Department of Commerce)!

The durable goods report is an important gauge of an economic recovery, because it focuses on big-ticket items that are purchased by businesses and consumers, which are meant to last at least three years; a sign of longer-term business and consumer spending and confidence.

Last month, I presented a chart in these pages to highlight the record amount of durable goods inventory being created in this country. Well, the record inventory levels continued into March, making it the 27th consecutive month of inventory increases. There had better be a strong economic recovery or someone will be stuck with $375.1 billion in durable goods on inventory-stacked shelves.

As my readers know, to get a better gauge of how consumer spending is faring in this economic recovery, I like to use the new orders numbers, which remove defense spending and aircraft orders out from the durable goods numbers reported. In March, non-defense capital goods excluding aircraft contracted by 0.8%, while economic expectations were for a one-percent gain.

This clearly does not bode well for consumer spending and the economic recovery in this country.

There are serious other forces at work.

U.S. durable goods by their very nature must be manufactured here in the U.S—they are goods after all. In 2010, manufacturing contributed to 1.2% to GDP growth. In 2011, manufacturing contributed only 0.5% to GDP growth (source: Bloomberg, April 25, 2012), denting the GDP numbers and economic recovery. The trend has continued thus far in 2012, with manufacturing slowing. Obviously, this is a reflection of a weak economic recovery and weak consumer spending here in the U.S.

The largest manufacturers here in the U.S. are experiencing reduced demand from China. Caterpillar Inc. (NYSE/CAT) beat analyst estimates with their first-quarter earnings report, but then noted that, for 2012, their previous forecast of five percent to 10% growth from China has now been changed to a decline (source: Financial Times, April 29, 2012)!

Luckily, they see growth in the U.S. Not from an actual economic recovery, but from the fact that construction companies need to replace their very old machinery.

E.I. du Pont de Nemours and Company (NYSE/DD) was stunned to report that, while Latin American earnings grew 23% in the first quarter, revenues from Asia fell two percent.

3M Company (NYSE/MMM) cited a considerable slowdown in both Japan and China that could impact its earnings in 2012.

For the first quarter of 2012, United Technologies Corporation (NYSE/UTX) reported 20% growth in Brazil, India and Russia, but was stunned when Chinese orders dropped by 15%.

(Also see: Many Public Companies Predicting Soft Earnings for Balance of 2012.)

Should the recessions in the eurozone continue (and they will), it will affect China, because Europe is China’s largest export market. If China experiences no economic recovery as a consequence of Europe continued economic contraction, it will affect the U.S. manufacturers that sell into China, jeopardizing the U.S. economic recovery.

Not only will the U.S. economic recovery be affected by weak U.S. consumer spending, but also exports could fall because of China. So if you want to buy this stock market rally on the hopes that the recession in Europe and the slowdown in China don’t matter to the U.S., then by all means…

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning at approximately 1,000 points below its record high set in October of 2007. Quite a feat? Not really.

A multi-year history of artificially low interest rates, a 50% increase in government debt in five years, and trillions of dollars in newly printed money are the real reasons the stock market is up. Take these three factors away and corporate America would be in real trouble.

But the bottom line is that borrowing and money printing cannot go on for years, as both events cause inflation, which pushes interest rates higher. I still believe there is life left in the bear market rally that started in March of 2009, albeit limited life. Trend carefully, dear reader.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.