Forget next year, or the year after; the financial crisis of 2008 has left wounds on the U.S. economy that will take generations to heal. While some may suggest the U.S. economy is on the path of economic recovery, today I’m going to spell out why I disagree with them wholeheartedly.
For there to be a real economic recovery in the U.S. economy—and not house prices increasing and the stock market rising—the general well-being of the people in America must improve. They should be able to feel comfortable spending money on items they purchase (even basic food) and they must feel secure in their employment.
I can’t put enough emphasis on this; American consumer confidence in the U.S. economy and in consumers’ personal futures must improve before the U.S. economy sees any economic recovery. Consumers are the fuel of economic growth, accounting for 70% of U.S. gross domestic product (GDP) yearly.
But Americans aren’t feeling better about their prospects in the U.S. economy. Some are suffering more than ever. According to the U.S. Census Bureau, poverty in the U.S. economy increased in 2011 for the third consecutive year. The report revealed that 46.2 million people in the U.S. economy live in poverty—or 15% of the entire U.S. population. (Source: U.S. Census Bureau, September 12, 2012.) Will you be surprised to see poverty increase even more in 2012? I won’t be.
Now, here’s what most people don’t realize:
The U.S. government is helping to keep the poverty rate low. If we took the government’s social security program out of the picture, the poverty rate in the U.S. would skyrocket to 24.4% of the U.S. population, as there would be an additional 27 million people in the U.S. economy suffering.
If it’s not enough to see how the way of life for the poor in America is crumbling, you should also know that the middle class are seeing their wealth deteriorate. Between 2007 and 2011, real median household income in the U.S. economy fell 8.1%! This means that if a family earned $100.00 in 2007, they now only earn $91.90. Add real inflation of five percent per annum, and U.S. consumers have really been set back.
In these pages, I have rigorously discussed how underemployment is a major issue currently facing the U.S. economy. If it doesn’t improve, expect further increases in poverty and say goodbye to any chances of economic recovery. The underemployment rate (which includes people who have given up looking for work and those with part-time jobs who can’t find full-time work) still stands at the alarming rate of just under 15%.
And of the jobs being created in the U.S. economy post-recession, the majority is in low wage-paying industries like retail and restaurants. Remember, when people don’t have jobs, or if they have jobs that don’t pay well, they can’t really rely on much other than their savings—if they have any.
It seems to me like all the talk about economic recovery in the U.S. economy is simply based on rising house prices and a rising stock market. The smart money realizes two important facts here.
First, the rise in house prices has been miniscule when compared to how much they have fallen. As soon as the “official” inflation rate rises, interest rates will rise, and U.S. housing will get a second nail in its coffin.
Next, since 2009, the stock market has risen on artificially low interest rates, record government spending, and a record expansion of the money supply—three events I call artificial, short-term bandages. Can you imagine what will happen to consumer confidence once the bear market rally in stocks we have been experiencing since 2009 ends?
Where is S&P 500 headed? This question is being asked everywhere now days. Some mainstream stock advisors are saying that we are going to break the all-time high on the S&P 500 and the pullback in the market is temporary. They are chanting “Buy now or you will miss it.”
Sadly, I don’t think they are looking beyond the hype. There are more reasons to be worried than to cheer for a stock market rally. The S&P 500 and other key stock indices are missing the most basic ingredients that drive the markets to the upside: corporate earnings and business confidence.
So far, 468 of the S&P 500 companies have reported their third-quarter corporate earnings—that’s 93.6% of the constituents. Surprisingly, 71% have reported corporate earnings above what the markets were expecting, but only 40% of them beat the revenue expectations. The overall earnings for the third quarter for S&P 500 companies are down -0.2%. (Source: Factset, November 16, 2012.)
In addition to corporate earnings being dismal, businesses are also planning to scale back on spending and delay projects. They are worried about the uncertainties in the U.S. economy and the global economy—exports, a recession-infested eurozone, a slowing China, and the U.S. federal government’s budget plans. Business investments in equipment and software, a key indicator gauging the economic activity of corporate America, slowed down for the first time since early 2009 in the third quarter of 2012. (Source: Wall Street Journal, November 18, 2012.)
Some S&P 500 companies that are planning to cut capital spending include Texas Instruments Incorporated (NYSE/TXN), Harris Corporation (NYSE/HRS) and Apple Inc. (NASDAQ/AAPL). Similarly, Caterpillar Inc. (NYSE/CAT), another S&P 500 company, which expected to spend $4.0 billion in building and expanding this year, it is now retracting that target.
Looking forward, the corporate earnings pictures does not look like it will improve.
What we already know is that the S&P 500 companies are expecting their fourth-quarter corporate earnings growth to be worse than third-quarter earnings growth. I, for one, will not be surprised to see poor fourth-quarter 2012 earning growth from the S&P 500 companies.
For the stock market and key stock indices like S&P 500 to go up, corporate America needs to make money and spend. The stock market cannot run forever on artificially low interest rates, record government spending, and record money printing, just like a car can’t run on air. In the end, all stock markets rise or fall based on the corporate earnings growth of the companies that trade in the market. And I simply don’t see 2013 being a better year for corporate earnings growth in the U.S. than 2012.
What He Said:
“As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in Profit Confidential, November 21, 2007. A dire prediction that came true.