What the Three-Week 933-Point Drop in the Dow Is Telling Us

U.S. economyIf you ask me where the U.S. economy is going, I will say “nowhere.” The U.S. economy is stalling. We have no economic growth.

For a moment, let’s ignore the show being put on by Congress and its effects on the U.S. economy.

According to a study by Fitch Ratings of 361 companies in the U.S. economy, these companies will see their collective capital expenditures decline 1.4% in 2014, following meager growth of 1.4% in 2013. In other words; capital expenditures in the U.S. economy by corporations are flat. (Source: Fitch Ratings, September 23, 2013.)

What does this mean? Capital expenditures are expenses companies incur to expand or improve their businesses; for example, investing in plant and equipment or replacing old technology. If capital expenditures are expected to decline, it suggests one of two things: either companies want to preserve their cash, or companies do not believe investing in their business will increase sales or cut costs.

As investors, we must remember that companies are at the forefront; they’re able to see shifts in supply and demand before the data are compiled and passed onto investors. If they don’t have the confidence to invest in their own businesses, I doubt it means economic growth is ahead.

But a lack of commitment to capital expenditures by American corporations isn’t the only indicator suggesting the U.S. economy is going the wrong way. Consumer spending, which is the backbone of economic growth in the U.S. economy, isn’t impressive either.

The National Retail Federation predicts that in the Halloween shopping period, there will be a seven percent decline in the number of Americans taking part in Halloween shopping as compared to last year—and these Americans will be spending less. On average, consumers in the U.S. economy are expected to spend $75.03 on Halloween-related merchandise this year, compared to $79.82 last year. (Source: National Retail Federation, September 23, 2013.)

Why even think about Halloween spending? Historically, the increase or decrease in Halloween spending by consumers has been a prelude of what to expect in respect to consumer spending in the ensuing holiday shopping period (Thanksgiving, Christmas).

Consumers in the U.S. economy are becoming cost-savvy. We heard during the back-to-school period that retailers had to give extra discounts to lure in consumers. The same will need to happen during the holiday shopping season—lots of discounts. But the more retailers discount, the less money they make and the more pressure there is on their stock prices.

Economic growth? We just don’t have it. And key indicators are suggesting we won’t have much of it going forward, either.

But have no fear, dear reader. This morning we heard the news that President Obama will nominate Janet Yellen to replace Ben Bernanke as head of the Federal Reserve. My bet, from what I have read on Yellen, is that because the economy is weak and getting even weaker, the paper money printing tap will not be shut off for a long, long time.

The 2013 third-quarter corporate earnings reporting season is about to begin. Going into it, we already have dismal information. Of the S&P 500 companies, 89 have issued negative outlooks about their corporate earnings for the third quarter and only 19 have issued positive guidance. The percentage of companies issuing negative corporate earnings guidance is the highest ever recorded—82%. (Source: FactSet, October 1, 2013.)

The 933-point drop in the Dow Jones Industrial Average since September 19 shouldn’t be taken lightly; I think it has less to do with the antics in Washington and more to do with the suddenly slowing U.S. economy.