Formally established in 1993, the eurozone, often referred to as the “European Union,” is a political and economic union established after the ratification of the Maastricht Treaty by members of the European Community. It has since expanded to include some Central and Eastern European nations. The establishment of the eurozone provided for the creation of a central European bank and the adoption of a common currency: the euro. The idea behind the eurozone is to create a single geographical market where goods, services, and money can be exchanged freely.
A recession for the global economy is becoming an increasingly likely scenario.
The Chinese economy, the second-biggest in the world, witnessed a contraction in manufacturing in May. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered 49.6 for May, declining from 50.4 in April. (Source: Markit, May 23, 2013.) Any number below 50 represents contraction in the manufacturing sector.
The Chinese economy exports a significant amount of what it produces to the global economy. Contraction in Chinese manufacturing shows exports are falling—the global demand for goods is falling.
Similarly, Germany’s Flash Manufacturing PMI showed continuous contraction in the manufacturing sector. The index stood at 49.0 in May. (Source: Markit, May 23, 2013.) The German economy is important to observe, because it’s the largest economy in the eurozone and an economic slowdown in the nation can send the common currency region into another downward spiral, again affecting the global economy.
Looking at other key indicators, they are pointing to an economic slowdown ahead in the global economy. Consider the copper market. Demand for copper is suggesting activity in the global economy is sluggish, even deteriorating.
Copper prices are down more than 10% since the beginning of 2013, and stockpiles of the brown metal, tracked by the London Metals Exchange (LME), are up a staggering 95% this year! (Source: Bloomberg, May 23, 2013.)
Other industrial metal prices, such as aluminum, lead, nickel, and zinc, are in decline as well.
How can the U.S. economy possibly improve when the global economy is in trouble?
The U.S. is highly affected by any shift in demand in the global economy.
After the financial crisis … Read More
A healthy housing market is essential to economic growth in the U.S. economy. But despite what we are hearing from the media, the housing market rebound is facing major headwinds.
To start with, home prices in the U.S. housing market are nowhere close to their pre-crash levels. There are millions of homeowners in the U.S. economy whose homes are worth less than what they originally paid for them. From their peak in 2006, home prices in the U.S. housing market are still down roughly 30%. For millions of homeowners to break even on their home investment, home prices will have to go up by at least 40%.
We just learned housing starts plunged 16.5% in April from March. (Source: U.S. Census Bureau, May 16, 2013.) This decline in new housing starts was one of the sharpest declines since mid-2011.
The chart below depicts housing starts from 2001 to today. Notice the recent sharp decline in housing starts.
Chart courtesy of www.StockCharts.com
Housing starts may not be a very exciting number to some, but I follow housing starts to gauge consumer spending. Think of it this way: when a family buys a new home they need to buy things that are needed in the household—new furniture, appliances, lawn mowers, and so on. It is this spending that ultimately results in economic growth for the U.S. economy.
Construction spending in the U.S. economy is also on the decline. It registered an annual rate of $893.6 billion in December of 2012, and by March 2012, construction spending fell to an annual rate of $856.7 billion—a decline of four percent. (Source: Federal Reserve Bank … Read More
Conglomerate General Electric Company (NYSE/GE) said, “We planned for Europe to be similar to 2012, down again, but it was even weaker than we had expected.” (Source: “Earnings Insight,” FactSet, May 17, 2013.) General Electric (GE) reported corporate earnings of $0.34 per share in the first quarter, with sales in its industrial businesses declining 5.7% and profit falling 11%. (Source: MarketWatch, April 19, 2013.)
McDonalds Corporation (NYSE/MCD), in announcing its first-quarter results, stated, “For the quarter, Europe’s results were dampened by ongoing economic uncertainty.” (Source: Ibid.)
When talking about the eurozone, the chief executive of Whirlpool Corporation (NYSE/WHR), Jeff Fettig, said, “…demand is not recovering so far.” He added that Whirlpool’s sales were unchanged this year in Europe, and he warned that if the demand continues to slide, Whirlpool will have to make more changes to cut costs. (Source: “Companies Feel Pinch on Sales in Europe,” Wall Street Journal, April 28, 2013.)
GE, McDonalds, and Whirlpool are not the only companies in the key stock indices suffering from troubles in the eurozone. Big-cap companies like International Business Machines Corporation (NYSE/IBM), United Technologies Corporation (NYSE/UTX), and Xerox Corporation (NYSE/XRX) have also shown concerns in their first-quarter corporate earnings due to bleak demand in the eurozone.
What’s ahead for the eurozone? The strongest nations in the region, such as Germany and France, are struggling to keep up. France is in a recession, while the German economy showed very little change … Read More
The disconnect between the stock market and the U.S.economy continues to grow, as the key stock indices run way ahead of reality.
The fundamental reasons behind the rise in today’s key stock indices are missing. For a real rally to happen, there has to be rising demand in the U.S. economy, consumers must be confident to spend, and businesses should see their sales rising. None of this is taking place.
Industrial production in the U.S. economy decreased 0.5% in April—marking the second decline since the beginning of the year. (Source: Federal Reserve, May 15, 2013.)
Similarly, manufacturing in the U.S. economy is also portraying a bleak picture of demand. Manufacturing output in the U.S. economy declined 0.4% in April after continuing its slump from March, when it decreased by 0.3%.
In the first quarter, a large number of companies on the key stock indices, like the S&P 500, were able to show better-than-expected corporate earnings. But in hindsight, they showed one troubling phenomenon: as the majority of the companies on the S&P 500 have already reported their corporate earnings, only 48% of them were able to beat revenue expectations. (Source: FactSet, May 10, 2013.)
Looking ahead, the picture for the key stock indices in the U.S. economy doesn’t look bright. For example, as of May 10, out of all the companies on the S&P 500 that have issued their corporate earnings guidance, more than 79% of them have issued a negative outlook. The estimated earnings growth rate for companies on the S&P 500 stands at 1.6%, compared to 4.5% near the end of March.
On top of all these troubles … Read More
In the first quarter of 2013, the eurozone continued to witness an economic contraction. The gross domestic product (GDP) of the 17-nation region declined 0.2%. This decrease in the GDP marked the sixth straight quarter of economic contraction in the eurozone and the longest since 1995. (Source: Reuters, May 15, 2013.)
The debt-infested countries in the eurozone, such as Greece, Spain, Italy, and Portugal, are already experiencing severe economic contraction; and to say the very least, they have a lot of issues to resolve before they even come close to seeing any economic growth.
What concerns me the most is that the stronger nations in the eurozone are starting to show weakness—the economic slowdown is picking up speed. It could make the economic contraction in the entire region much more severe and could send the eurozone into another downward spiral.
Consider the French economy—the second-biggest economic hub in the eurozone. In the first quarter of 2013, France witnessed an economic contraction—GDP declined 0.2% and France entered a recession. (Source: Bloomberg, May 15, 2013.) For the past few quarters, France’s economy has been witnessing severe pressures, and unemployment in the country continues to be a major problem.
Similarly, Germany—the biggest nation in eurozone by GDP—grew at a dismal pace in the first quarter of 2013, below economists’ estimates. The German Federal Statistical office reported that the German economy grew 0.1% in the first quarter, and the revised calculation showed the country experienced an economic contraction in the last quarter of 2012, when its GDP declined by 0.7%. (Source: Destatis, May 15, 2013.) But there are even more troubling … Read More
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