If we split the economy into consumers and businesses, both groups are pointing to a slowdown in the economic expansion that started in 2009.

Let’s start with the American consumer…

Consumer confidence in the U.S. unexpectedly fell this June to a seven-month low and, according to report yesterday from the U.S. Commerce Department, consumer spending stagnated in May.

The American consumer savings rate rose to five percent in May from 4.9% in April—an indication that consumers are continuing to focus on saving as opposed to spending. Back in the boom days of 2006 and 2007, the savings rate in America was zero.

Consumers are concerned, the unemployment rate remains high, and low-interest rates have failed to get American consumers spending again.

Turning to businesses…

According to a survey by Bloomberg, analysts are expecting the S&P 500 companies to report a 10% increase in revenue this year.

When the recession hit hard in 2008, companies cut payrolls, and sold off or closed unprofitable divisions—they quickly cut expenses. But with the trimming of expenses all but done, companies have no other option to increase profits but to augment sales. With 70% of U.S. GDP based on consumer spending, increasing sales is easier said than done.

American companies are sitting on a record amount of cash. To increase profits, companies will need to reinvest that cash into their businesses or make acquisitions to generate growth. But given that most CEOs are still worried about the economy—the fear surrounding that dreaded double-dip recession—companies are preferring to sit on their cash as opposed to reinvesting it.

Given the scenario I’ve just painted above, how can the economy not slow down in 2011?

Michael’s Personal Notes:

I’ve been writing, begging my readers to avoid U.S. Treasuries. And, yesterday, investors found out quickly that it doesn’t take much for the price of U.S. Treasuries to tumble.

Wednesday, the yield on the 5-year Treasury rose to its highest level since January, as demand at a $35.0-billion auction of 5-year notes fell to its lowest level since June 2010.

Sure, the news reports will tell us that it looks like Greece will pull through its economic crisis, reducing investor demand for the security of U.S. Treasuries, but let’s call a spade a spade. Why would investors buy securities issued by a country that is technically bankrupt, where the securities yield less than inflation, where the currency in which the securities are issued is printed as needed.

Where the Market Stands; Where it’s Headed:

After a devastating Phase I bear market brought stocks to their knees in March of 2009 (with the Dow Jones Industrial Average hitting a 12-year low of 6,400), Phase II of the bear market rally started on March 9, 2009.

Phase II of the bear market brought the Dow Jones Industrial Average to a post-crash intraday high of 12,876 on May 2. 2011. Subsequently, with too much optimism in the air, the Dow Jones fell to 11,900 on June 15, 2011. Since then, the stock market has been recovering, with the Dow Jones opening this morning at 12,188.

I believe that Phase II of the bear market, the rally, still has life left in it. As per my lead article today, there is no doubt that the U.S. economy is stagnating—but the bear’s job of luring more investors back into stocks is not done yet.

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American-grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

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Tags: Bear Market Rally, consumer spending, double-dip recession, economic crisis, economic news, economic slowdown, low interest rates, S&P 500, U.S. Commerce Department, U.S. recession, U.S. Treasuries