Medium-term Economic Picture Worsens

economic analysisThere is rapid inflation in the system, dear reader, but let’s not speak too loudly about it.

 I’ll keep this note to a whisper as we turn our attention to the just-released Institute of Supply Management’s factor index. The institute’s survey of manufacturers throughout the U.S. includes a discussion on commodity prices. Commodity prices are a critical component of manufacturers’ costs, because they are the inputs used to produce all of the goods that consumers purchase in this country.

 For February of this year, commodity prices increased six percent from January’s level! What is critical to note is that this rate is accelerating and manufacturers are growing concerned about the vigorous increase in commodity prices.

 At the same time that the U.S. released its manufacturing data, Europe did the same. Manufacturing in Europe continues to contract, but one of the most important components of the survey showed that commodity prices—from oil to plastics to steel—had the sharpest rise since June 2011.

 Worse, the acceleration—rapid inflation—in commodity prices is occurring at the fastest rate in the survey’s history!

 It was not one or two of the countries in Europe that was responsible for this record rise. The survey highlighted the fact that the rapid inflation rise in commodity prices was found in all of the 17 members of the eurozone.

 This note of concern from the survey in Europe was confirmed by the Producer-Price Inflation European Index, which increased 0.7% in January. The annual rate of increase for this index is accelerating.

 England just released its measure for January’s producer prices. Commodity prices increased in January at the fastest pace in nine months with all costs for manufacturers—dominated by commodity prices—rising seven percent year-over-year in January, from January 2010.

 India also reported its Purchase Manager’s Index for January, which had a healthy gain as well. However, the cost of finished products—where commodity prices are a large component—increased at the fastest pace in almost a year.

 Around the world, signs of commodity price rapid inflation are evident. What is more troubling is that, recently, the pace of rapid inflation has been accelerating. Central banks want to keep interest rates low, but it will be interesting to see how that can be accomplished if rapid inflation continues.

 If rapid inflation persists, then that will put pressure on interest rates, which in turn will put pressure on the stock markets around the world, especially here in the U.S.

 There is a very dangerous mix brewing: world economic growth is slowing, inflation is rising, and interest rates are at record lows. Reduced interest rates are needed to spur economic growth. But an extended period of reduced interest rates and money printing (like we have just gone through) usually results in rapid inflation, which then pushes interest rates higher, stifling the economy.

 While we are told about the U.S. employment picture improving, while the media tells us the economy is getting better, while the stock market continues to rise, the medium-term picture for the economy is actually worsening in my opinion. (Also see: U.S. Will Not Escape Slowdown in Europe and Asia.)

 Michael’s Personal Notes:

It seems the real economy doesn’t want to cooperate with interest rates at record lows, record-high government debt levels, and the fattest Fed balance sheet on record.

 For November and December of 2011 and January of 2012, inflation-adjusted consumer spending was flat when compared to 2010 (source: U.S. Commerce Department). Let’s keep in mind that November and December represent the busiest consumer spending shopping season because of the holidays.

 Our research says that consumer spending was flat because real disposable personal income was flat. For January, inflation-adjusted real disposable personal income actually fell 0.1% (source: Commerce Department).

Real disposable personal income has fallen two of the last three months. Year-over-year, real disposable income was up a mere 0.6%.

 Since consumers’ current disposable incomes couldn’t keep up with inflation in January, this means that consumers needed to dip into their savings in January just to maintain their standard of living. (See: Consumer Debt Growing Again: This Time Not By Choice.)

 We can see it in the numbers…

 For January 2012, the consumer savings rate fell to 4.6% from 4.7% (source: U.S. Commerce Department):

 We continue to ask the same question around here: how can gross domestic product (GDP) and economic growth resume here in the U.S. when consumer spending is 70% of GDP and real disposable personal income is falling?

 Compound this with the fact that, for the month of February, oil prices were up over 10%! This does not bode well for February’s consumer spending and real disposable personal income numbers—never mind economic growth.

 For February, manufacturing in the U.S. slowed 1.7% from January’s level, as reported by the Institute of Supply Management’s factory index, which is the most broad-based manufacturing index in the U.S. Lower U.S. consumer spending didn’t help.

 Most disturbing in the report: “new orders” for good, which are reflective of future economic growth because they keep track of customer orders that will be delivered in the future, fell 2.7% from January’s reading.

 More proof, dear reader, of no economic growth and a bear market trap.

 Where the Market Stands; Where it’s Headed:

 This morning, China’s government cut its economic growth for 2012 to 7.5%—the lowest level of economic growth for the country in eight years. The news resulted in a pull-back for stock market futures.

 Dear reader, I keep singing the same tune: there will be no economic growth in the U.S. this year. The stock market rally we have enjoyed since March 2009 is a sucker’s rally with the purpose of bringing investors back into the stock market before stock prices decline again. This opinion stands.

 What He Said:

 “You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that are being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing that more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.