Posts Tagged ‘GDP growth’
Is the Federal Reserve ignoring the very basic law of economics…the law of diminishing marginal utility? You remember that term from economics in high school. The law of diminishing marginal utility states that the more of something you have, the lesser its impact on you.
The Fed has been printing money in hopes of stimulating growth in the U.S. economy. As the Fed printed more paper money, its balance sheet grew to over $4.0 trillion.
Below, I’ve made a table that looks at gross domestic product (GDP) growth in the U.S. each year since 2009, and where the balance sheet of our central bank stood at the end of each year.
In the table below, you will notice something interesting; aside from 2009, there is no real correlation between the increases in the assets (paper money printed) on the Fed’s balance sheet and GDP growth. In fact, after all the money the Fed has printed, the U.S. economy grew last year at its slowest pace since 2011.
U.S. GDP Growth vs. Growth in Size of Fed Balance Sheet
|Fed Balance Sheet (Trillions)||YOY Change in Balance Sheet|
Data source: Federal Reserve Bank of St. Louis web site,
last accessed April 1, 2014.
The Federal Reserve predicts the U.S. GDP in 2014 will increase between 2.8% and three percent; that’s a jump of about 50% since 2013. (Source: Federal Reserve, March 19, 2014.) I believe this to be way too optimistic. (And as we … Read More
Consumer spending in the U.S. economy is highly correlated to consumer confidence. If consumers are worried about the economy, they pull back on their spending.
The Conference Board Consumer Confidence Index decreased by 1.63% in February from January. (Source: Conference Board, February 25, 2014.) And we see the corresponding pullback on consumer spending in weak U.S. retail sales.
Macy’s, Inc. (NYSE/M) reported a decline of 1.6% in revenue in its latest quarter—which includes the holiday season. For its just-completed fiscal year, company revenues were up by only 0.9%. (Source: Macy’s, Inc., February 25, 2014.)
Sears Holdings Corporation (NASDAQ/SHLD) reported a decline of 12.6% in revenues in its latest quarter. Yes, I know this company is having problems; but a drop in revenue of 12.6% for a retail giant like this—and during the holiday shopping season—is an indicator that consumer spending is very weak. (Source: Sears Holdings Corporation, February 27, 2014.)
Target Corporation (NYSE/TGT) reported revenues fell by 3.8% in its last fiscal quarter. (Source: Target Corporation, February 26, 2014.)
Best Buy Co., Inc. (NYSE/BBY) is in a very similar situation. The company reported a decline of more than three percent in revenues for its latest quarter. And for the 12 months ended February 1, 2014, Best Buy’s revenues fell 3.4%. (Source: Best Buy Co., Inc., February 27, 2014.)
The retailers I just mentioned are just a few of the many retailers that reported a decline in their revenues in the last quarter of 2013, which suggests consumer spending is in troubling territory.
My point is that those companies that are closest to consumer spending—the big American retailers—are giving us a … Read More
In 2013, the U.S. economy, as measured by gross domestic product (GDP), rose at an average rate of 1.9% compared to 2.8% in 2012. And as it stands, GDP may slow further in 2014.
What makes me think this?
In January, U.S. industrial production declined by 0.3% from the previous month. This was the first decline in production since August of 2013. Production of automotive products in the U.S. economy declined by 5.15%, and appliances, furniture, and carpeting production declined by 0.6% in the month. (Source: Federal Reserve, February 14, 2014.)
And factories in the U.S. economy just aren’t as busy as they used to be. The capacity utilization rate, a measure of companies using their potential production, was 78.5% in January. The average rate between 1979 and 2013 has been 80.1%. While a difference of two percent in factory utilization isn’t a big number, because overhead is often fixed in factories, a two-percent decline in production is a big deal.
Then there’s the inventory problem; inventories in the U.S. economy continue to increase. In December, inventories at manufacturers increased by another 0.5% to $1.7 trillion. From December 2012, they have increased by 4.4%. (Source: U.S. Census Bureau, February 14, 2014.)
We have a situation in the U.S. economy today where factories are working at lower capacity than they have historically, while business inventories are rising—two bad omens for the economy; hence, you can see why I’m concerned about economic growth in 2014.
It’s a domino effect…
Inventories increasing suggest consumer demand is stalling. Examples of consumer spending declining in the U.S. economy are many. As I have … Read More
While the focus is on the government shutdown and debt ceiling, I’m getting ready for the start of another earnings season, to see if America delivers. Of course, the somewhat muted gross domestic product (GDP) growth has me fully expecting to see a drag in revenues across the broad.
Alcoa Inc. (NYSE/AA) starts the third-quarter earnings season when it reports after the markets close tomorrow. The company is a pretty decent indicator for the global economy, as aluminum is used in a broad assortment of industrial and consumer applications around the world.
The company is forecasted to earn $0.06 per diluted share on revenues of $5.71 billion, down 2.1% year-over-year, according to Thomson Financial. For this reporting year, Alcoa is expected to see revenues contract 2.8%, followed by 2.8% growth in 2014. This essentially means zero growth over two years. In my books, that’s not good; this clearly indicates a global economy that’s in trouble.
I don’t even think traders are expecting some miraculous jump in revenues or earnings in the third-quarter earnings season. Wall Street has already downgraded expectations for the earnings season.
Earnings growth for the third-quarter earnings season is estimated at 3.2%, according to a FactSet report dated September 27. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, September 27, 2013; last accessed October 4, 2013.) The number is well down from the estimate of 6.5% as of June 30.
The financial sector is expected to report the top growth, while the healthcare sector is projected to report the lowest level of growth in the third-quarter earnings season. Of course, should the U.S. government shutdown … Read More
Analysts and investors demand clarity when a company reports or offers up guidance. But when it comes to the Federal Reserve, investors and analysts don’t seem to demand the same level of clarity, even though the central bank has been what I would label “wishy washy” as far as its policies and what it offers up to the market.
The stock market is trading (and it has been for a while) on what the Federal Reserve says about its quantitative easing program, namely its monthly bond-buying strategy.
Yet the Federal Reserve appears to be saying one thing, only to contradict it with the next statement. This type of confusion and uncertainty is not what I want to hear. I want more certainty in order to formalize my trading and investment strategy. The cloudiness offered by the Federal Reserve doesn’t help.
Case in point: at last week’s Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Ben Bernanke, to the surprise of nearly everyone both on Wall Street and Main Street, announced that the bank had decided against tapering, despite what I see as moderate growth in the economy. Yes, the country continues to slug along, but with the second-quarter gross domestic product (GDP) growth at 2.5% and with the Federal Reserve estimating the country will continue to expand at a rate above two percent this year and in 2014, the Federal Reserve should have begun to rein in some of its bond buying. Pundits were estimating a $10.0-billion cutback to start.
Well, even that small cut didn’t happen. Bernanke said the economy was still fragile, and the Fed didn’t … Read More
In my view, this is the new reality in the retail sector. And it’s not only hurting the retail sector, but it is also supporting an increase in traffic at the major discount mall operators, such as Tanger Factory Outlet Centers, Inc. (NYSE/SKT) and king of discount malls Simon Property Group, Inc. (NYSE/SPG), which owns the well-known Premium Outlets centers.
If you haven’t been to the Premium Outlets malls, these are large malls where there are as many as 100 stores offering quality goods at cheap discount prices. All of the major retailers are there.
Yet the retail sector continues to show mixed results that clearly do not suggest consumer spending is rising at levels the economy wants to see, given the low interest rates.
Retail sales in July were better than expected, but in my view, they still don’t support a massive spending push in the retail sector, which means potential problems brewing for America’s gross domestic product (GDP).
We are beginning to see weakness amid the department stores in the retail sector. There was even a disturbing report from bellwether retail giant Wal-Mart Stores, Inc. (NYSE/WMT), which reported dismal growth in the U.S. and around the world. When this happens, you know all is not right in the retail sector, as Wal-Mart is a good barometer of consumer spending activity.
So it wasn’t a surprise to see department store Macy’s, Inc. (NYSE/M) fall short in its fiscal second quarter after … Read More
If everything is so fine with the economic recovery in both America and the global economy, then why are the emerging markets failing to rebound? It seems somewhat odd how the global economy could be fine when its key trading partners in the emerging markets are not.
You all know how much I like the emerging markets longer-term. (Read “Think Global for the Best Investment Opportunities.”) However, the short- to mid-term is another story, as there’s clearly some stalling.
The HSBC Emerging Markets Index (EMI) declined to a contractionary 49.4 reading in July, versus an expansionary 50.6 in June. This was the first contraction reading since 2009.
The HSBC reading is also a red flag to the stock market that, as I have been saying in recent commentaries, is showing some cracks in its foundation.
If the U.S., Europe, and China are fine, then the emerging markets should be too—but they’re not fine, so you should be wary of this. A pickup in the emerging markets is needed to get the ball rolling on economic growth.
As shown on the iShares MSCI Emerging Markets (NYSEArca/EEM) exchange-traded fund (ETF), the emerging markets have been under some duress since peaking in May, based on my technical analysis.
Chart courtesy of www.StockCharts.com
Here’s what’s happening at this juncture:
GDP growth in China has stalled, holding above seven percent. The manufacturing sector may be contracting, that is if you believe the HSBC estimate over the official estimate from Beijing, which says manufacturing is expanding.
Then you have the dismal state of affairs in the eurozone and Europe. Six of the 17 eurozone … Read More
And when we look closely at the July U.S. jobs market report, it gets worse.
First off, the previous months’ numbers keep getting revised downward; the number of jobs added to the U.S. economy in May was revised down from 195,000 to 176,000, and June’s numbers were revised down from 195,000 to 188,000—combined, that’s 26,000 jobs that never really happened.
The underemployment rate, a statistic I consider to be a better measure of jobs market conditions, remained staggeringly high at 14% for the month of July. The big blow: it was higher than what it was during the months of March, April, and May, and only slightly lower than June. The underemployment rate takes into account people who have given up looking for work and part-time workers who can’t get full-time work.
There are close to one million discouraged workers in the U.S. jobs market, and the number of individuals working part-time because they are unable to find full-time jobs remained unchanged at 8.2 million in July.
Of course, one must ask: where are we seeing growth in the jobs market? If you guessed low-wage-paying sectors, then you are right. In July, a combined 85,000 jobs were added in the retail, trade, leisure, and hospitality sectors—more specifically, in food services and drinking places. This is 52% of all the jobs created during the month!
Employment in industries like construction, transportation and warehousing, mining and logging, and government sectors were … Read More
While I continue to hear politicians and the mainstream media tell me the U.S. economy is in a full-fledged recovery, I totally disagree with the notion.
I believe the truth of what’s going on with the U.S. economy is the total opposite of what we are being fed by both politicians and the mainstream media.
Look at the chart below of the change in the real U.S. gross domestic product (GDP) since the fourth quarter of 2011.
If we were witnessing recovery, or a period of economic growth, would we be seeing the GDP collapsing? The rate of change in the GDP has actually been declining since the first quarter of 2012. This by no means should be taken lightly, as it indicates a recession may be following because economic activity isn’t flourishing.
In fact, I see even more indicators favoring a recession ahead.
Consumers in the U.S. economy are struggling—their pockets are getting emptier. Jobs are being created in the low-paying retail and service sectors. Meanwhile, prices for goods are increasing. Thanks to higher oil prices, I suspect prices for goods will continue to see an uptick.
Dear reader, current estimates of GDP growth are too optimistic—but this will change. Consider this: The Federal Reserve expects U.S. GDP to grow 2.3%–2.6% this year. Currently, in the second quarter, we are only running at an annual GDP growth rate of 1.7%. This is 26% below the Federal Reserve’s lower estimates. Will our economic activity jump by 26% for the balance of this year? I highly doubt it.
This all brings me to one conclusion: the effects of the … Read More
Troubles in the Chinese economy are mounting as the economic slowdown in the world’s second-biggest economy takes its toll—troubles that could wash ashore here in North America sooner than most expect.
The Flash China Manufacturing Purchasing Managers’ Index (PMI) registered at 47.7 for July—a new eleven-month low. (Source: Markit, July 24, 2013.) Any reading below 50 on the PMI represents contraction in the manufacturing sector.
The Chinese economy is heavily focused on manufacturing, so a contraction of this magnitude indicates a severe economic slowdown for the country.
And that’s not all…
Gross domestic product (GDP) for China’s economy is quickly slowing. After growing for years at 10% per annum, in the first quarter of this year, China’s economy grew at only 7.7%; in the second quarter, the rate slowed further to 7.5%. (Source: MarketWatch, July 23, 2013.) Growth of 7.5% per year for the Chinese economy is embarrassing when compared to its historical average.
So why would an economic slowdown in China’s economy be a problem for us here at home?
China’s economy is the third-biggest destination for U.S. exporters.
As the economic slowdown in the Chinese economy strengthens, demand for goods and services within the country will decline. American exporters will face more downward pressures on profits as they export less to China. And U.S. GDP will get hit as exports are considered one of the major factors in its calculation.
But the damage the economic slowdown in the Chinese economy could have on American and Canadian exporters is just one small piece of the puzzle. Corporate earnings of U.S.-based companies operating in the Chinese economy will also … Read More
In the first quarter’s revised U.S. gross domestic product (GDP) numbers, we found consumer spending in the U.S. economy was slow, dragging U.S. economic growth lower. Going forward, I can’t help but to expect more of the same.
We are already getting warnings from major financial institutions that U.S. GDP growth in the second quarter will be dismal. The Goldman Sachs Group, Inc. (NYSE/GS) expects the U.S. economy to grow at only 0.8% in the second quarter. The Royal Bank of Scotland Group plc (NYSE/RBS) and Barclays PLC (NYSE/BCS) both expect U.S. GDP growth to come in at 0.5%. (Source: Wall Street Journal, July 15, 2013.)
It shouldn’t go unnoticed: consumer spending makes up about two-thirds of the GDP in the U.S. economy. If consumer spending declines, or remains stagnant, then it would be foolish to expect the U.S. economy to experience any growth.
Let’s look at retail and food services sales, a key indicator of consumer spending in the U.S. economy. Since the third quarter of 2009, the average rate of growth quarter-over-quarter in real retail and food services sales in the U.S. economy has been 0.9%. In the second quarter (April though June) of 2013, these sales only increased 0.81% from the previous quarter. (Source: Federal Reserve Bank of St. Louis web site, last accessed July 24, 2013.)
Unemployment—another indicator of pressure on consumer spending—remained a problem throughout the second quarter. While the mainstream media and politicians told us everything is great on the employment front, the reality was quiet the opposite.
In the U.S. economy, the underemployment rate, which provides a better look at the U.S. … Read More
According to the National Bureau of Statistics, the Chinese economy grew at an annual pace of 7.5% in the second quarter of this year from a year earlier—down from 7.7% in the first quarter. (Source: Bloomberg, July 15, 2013.)
Regular readers of Profit Confidential shouldn’t be surprised by that; I have warned about the slowing of the Chinese economy many times in these pages, and I continue to expect more weakness ahead. In fact, what we have seen so far might just be the tip of the iceberg.
While some might say that 7.5% is a decent amount of growth when comparing it to the gross domestic product (GDP) growth in countries like the United States, for the Chinese economy, it’s embarrassing. It’s well below its historical average growth rate.
And that’s not all. Earlier this year, the Chinese government set a target for GDP growth of 7.5% for 2013 and an even seven percent through to 2015—so what we are witnessing now is here to stay for some time.
Keep in mind that the International Monetary Fund (IMF) expects the Chinese economy to grow 7.8% this year—that’s a lowered expectation from April. And The Goldman Sachs Group, Inc. (NYSE/GS) and other major banks, like HSBC Holdings Plc (NYSE/HBC) and Barclays PLC (NYSE/BCS), have all reduced their forecasts for the Chinese economy. They expect China’s GDP to grow 7.4% this year—the worst growth rate for the Chinese economy since 1990.
What many don’t realize is that a slowdown of the Chinese economy has many global consequences. It will send ripple effects into the global economy. More … Read More
One fact has become quite clear: if we want to see robust growth in our gross domestic product (GDP), then there needs to be a significant change in consumer spending.
But current consumer spending in the U.S. economy is looking bleak, and it makes me skeptical about the GDP growth ahead. We’ve already seen GDP in the first quarter revised lower due to consumer spending; and it won’t be a surprise to me if something similar happens in the second quarter.
Don’t just take my word for it. Look at what the CEO of Family Dollar Stores, Inc (NYSE/FDO), Howard R. Levine, said about consumer spending while presenting his company’s corporate earnings for its fiscal third quarter (ended June 1, 2013):
“Our consumables sales remained strong and we continued to gain market share. However, our discretionary sales remained challenged as our customers have been forced to make spending choices between basic needs and wants. Consistent with market trends, we expect that our customers will continue to face financial headwinds…” (Source: “Press Release; Family Dollar reports Third Quarter Results,” Family Dollar Stores, Inc. web site, July 10, 2013.)
Remember: retailers like Family Dollar Stores see the patterns of consumer spending first-hand—their opinions shouldn’t be taken lightly.
More proof that consumer spending (which makes up a major portion of our GDP) isn’t as robust is the fact that wholesale trade sales are down and inventory figures are up. Inventories at wholesalers in May were up 3.3% as compared to a year ago. And inventories of durable goods were up 4.8% in the same period. (Source: U.S. Census Bureau, July 10, 2013.)… Read More
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