The April light sweet crude on the NYSE traded close to $104.00 a barrel on Monday. Not only are oil prices trending higher, but if you add in the recent signs of a pending economic slowdown, you as an investor should be concerned.
Last week, we talked about the anemic gross domestic product (GDP) for the fourth quarter of 2007 of 0.6%, but now there is more evidence that the U.S. may be headed for a recession this year. On Monday, data showed that U.S. manufacturing activity fell in February as reflected in the Institute for Supply Management manufacturing index, which came in at 48.3. This was the lowest reading since April 2003, and a decline from a 48.4 reading in December 2007. The concern is that the sub-50% reading indicates contraction in the manufacturing sector.
According to the report, industries that struggled in February included furniture, textiles, machinery and chemical products, while areas showing growth were apparel, leather, wood, plastics and rubber, and food and beverage.
Another piece of evidence that points to a slowdown was a fall in construction spending by 1.7% in January, according to the Commerce Department. The reading represented the largest decline in 14 years. Not only was residential building impacted, but it also spread to commercial projects.
With the recent slew of bad news on the economy, the Federal Reserve will probably need to continue to cut interest rates and we expect another 50-basis-point cut to 2.50% at the upcoming FOMC meeting on March 18. Yet it may be premature to assume that the aggressive cuts will help the U.S. economy sidestep a recession in 2008.
Clearly, signs point to more troubles ahead of us, so we advise caution when buying stocks. Stay clear of cyclical stocks that depend on the condition of the economy. Also be careful of businesses that produce and/or sell big-ticket items, as consumer spending will decline with a slowdown.