Global Economic Contraction Picks up Steam

I wrote a couple of months ago in these pages about the fact that the British economy officially entered a recession as of the first quarter of 2012, when the country released its GDP growth numbers. While Britain expected its third consecutive quarter of negative GDP growth in the second quarter of 2012, the economic contraction is worse than first thought, because GDP growth contracted by 0.7%!

This was the biggest falloff since 2009, when the world was in the midst of the financial crisis. This number means the British economy has a long way to climb in order to get itself out of this recession. From the services sector, to the manufacturing sector, to the construction sector, many of the key GDP growth components experienced declines.

The Olympics will provide a temporary boost to GDP growth, but the fear of how rapidly the economic contraction is accelerating right now has Britain talking about more quantitative easing (QE): money printing.

Britain is not being helped by the continued economic contraction and recession occurring with its significant trading partner, the European Union. The 17 nations of the European Union saw manufacturing remain flat in the month of June, but still deep into economic contraction territory. (Source: Markit Economics.)

According to the eurozone manufacturing report, jobs were lost for the seventh straight month, with June representing an acceleration of the job losses not seen since January of 2010. New orders for manufactured goods fell at the fastest pace since 2009!

This severe economic contraction was not been labeled a recession simply because Germany has been able to produce numbers that are barely positive. That has changed. Germany’s manufacturing sector has been declining for six months straight. As of May, manufacturing hit economic contraction territory and has been falling deeper into economic contraction ever since; June was no exception.

New orders for manufactured goods in Germany fell at the fastest pace since 2009! This exactly mirrors what is happening in the rest of Europe and almost ensures that, when GDP growth figures are reported, they will show Europe officially in a recession, instead of a severe economic contraction.

With the economic contraction and the problems of both Spain and Greece continuing to escalate, the calls in Europe for QE are being made loud and clear: more and more money printing please! (See: U.K. Money Printing Machine to Start Up Again.)

The eurozone today: lack of GDP growth leading to a more severe economic contraction, which could inevitably lead to a recession…a “train wreck,” for lack of a better term.

Where the Market Stands; Where it’s Headed:

We are near the end of the first seven months of 2012 and the numbers don’t look good. As of this morning, the Dow Jones Industrial Average is up 5.5% for 2012. This gain could easily and quickly be wiped out as the market adjusts valuations to reflect weaker corporate earnings.

A great number of companies are starting to adjust their earnings down for the remainder of the year. Starbucks Corporation (NASDAQ/SBUX), the world’s biggest coffee-shop chain, fell 10% after reporting it was lowering its earnings forecast for its next quarter. (Our most popular options trading service coincidently had recommended a put option on Starbucks last Friday…boy, did this option pop!)

The remainder of 2012 is not looking good for stocks unless we get the anticipated announcement from the Federal Reserve of what QE3 will be and when it will start.

What He Said:

“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt most when the air is finally let out of the housing market balloon will be those buyers who bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in Profit Confidential, March 1, 2006. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.