The biggest economic center in the global economy, the U.S., showed dismal growth in the last quarter of 2012. Sadly, the first quarter of 2013 is looking to be the same. Demand in the country is anemic at best as consumers are struggling.
New durable goods orders in the U.S. economy plunged 5.7% in March—the second decline in the first three months of 2013. (Source: United States Census Bureau, April 24, 2013.) Inventories of manufactured goods have been continuously increasing, seeing an increase in 17 of the last 18 months!
The HSBC Flash Manufacturing Purchasing Managers’ Index (PMI) for China indicated a slowdown in manufacturing output for the second-biggest economy in the global economy. The index plummeted to a two-month low in April, registering 50.5 in April compared to 51.6 in March. (Source: HSBC, April 23, 2013.) Any reading below 50 indicates a contraction in the manufacturing business.
Germany, the fourth-biggest economic hub in the global economy, is seeing its economic slowdown quicken. The Flash Manufacturing PMI for Germany dropped to a four-month low this month. The index stood at 47.9 in April, compared to 49 in March. (Source: Markit Economics, April 2013, 2013.) Yes, the manufacturing sector in Germany is experiencing a contraction. In Germany, exports orders to the global economy in April declined the most in 2013.
The “worsening” statistics I just gave you are of the main economic hubs in the global economy; others are in worse shape. France’s unemployment rate is becoming worrisome, and the country is bordering on a recession. Japan is already back in a recession; Italy is begging for growth.
Dear reader, I can’t stress this enough: a U.S. recession resulting from dismal demand in the key economic centers in the global economy is highly likely.
U.S. multinational corporations are already struggling for revenue growth. Eventually, all of this will be priced into the stock market as the misery in the global economy worsens.
The stock market is painting a rosy picture, but the truth is that it’s completely the opposite situation. We have a stock market propped up by massive amounts of money printing by the Federal Reserve. Take out the money printing, and the stock market and economy would collapse.
A report from Standard & Poor’s (S&P), the credit rating agency, indicates there is more than a one-third chance that Japanese sovereign debt could face a downgrade. The report stated, “…the continuing prospect arises from risks associated with recent government initiatives and uncertainty of their success.” (Source: Janowski, T., “S&P says more than one-third chance of Japan downgrade, cites risks to Abenomics,” Reuters, April 22, 2013.)
In an effort to spur economic growth in the country, the Bank of Japan is printing money “like mad.” But we already know this concept hasn’t worked very well for the Japanese economy in the past. Japan is in an outright recession, with exports in a slump and the value of its currency in a freefall when compared to other major currencies in the global economy.
Why does it really matter to North Americans what happens in Japan? Even though S&P kept the credit rating on Japan’s sovereign debt at AA- (or investment grade), the concern is how vulnerable the U.S. debt really is to its own credit rating downgrade.
Just like the Japanese economy, the Federal Reserve is using quantitative easing to print $85.0 billion a month in new paper money and has thus far increased its balance sheet assets to over $3.0 trillion. Similarly, the U.S. government has been “spending with two hands, while borrowing with a third.” Why? It’s all in the name of economic growth.
As the readers of Profit Confidential know, I have been very critical of quantitative easing. It may have been needed back when the financial system was on the cusp of bankruptcy in 2008. But continuing the process will just create more troubles ahead for the U.S. economy. The idea of quantitative easing and keeping interest rates artificially low for so many years can only work for so long before inflation becomes a problem.
The longer the government keeps on borrowing to spend, the higher the chances that the country will hit a point where a downgrade in the credit rating of the U.S. government debt is inevitable. We are the most indebted nation in the world by nominal value.
Economic growth means that the general standard of living increases, people are able to find jobs, and consumers are able to save and spend. Right now, the U.S. economy is far from it. Quantitative easing and easy monetary policies are threatening Japan’s credit rating. The U.S. will face the same situation if the country doesn’t get its spending and borrowing under control.
The question remains: what benefit has quantitative easing brought to the average American Joe? Chances are his after-inflation income has not risen in years, he is living in a home with negative equity, and he’s paying more for goods than he did not too long ago.
The stock market may rally on news about more quantitative easing, and politicians may cheer and say we have economic growth when they see the stock market continue to rise, but the reality is that the U.S. is becoming very similar to the Japanese economy.
What He Said:
They 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 started experiencing in 2008 long before anyone else.