Already Fragile Economy Hit with Falling Retail Sales, Rising Business Inventories

Rising Business InventoriesGross domestic product (GDP) in the U.S. economy mainly consists of consumer spending. Hence, the more consumers spend and buy, the better our economic conditions become. In 2012, consumer spending in the U.S. economy accounted for more than $11.1 trillion. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 12, 2013.)

Unfortunately, as we finish the first quarter of 2013, economic indicators are suggesting U.S. consumer spending is under severe pressure.

Retail sales in the U.S. economy just took a wrong turn and dropped 0.4% in March from February’s sales. Consumer spending at electronics and appliance stores, health and personal care stores, and general merchandise stores posted a negative growth compared to the same period in 2012. (Source: U.S. Census Bureau, April 12, 2013.)

Similarly, a key indicator of future consumer spending, the Thomson Reuters/University of Michigan’s preliminary consumer sentiment index declined to the lowest point in nine months in April. The preliminary consumer sentiment index registered at 72.3 in April, down from 78.6 in March. (Source: Reuters, April 12, 2013.) Remember: consumers turning pessimistic means a pullback in consumer spending.


At the other end of the equation, we see businesses in the U.S. economy increasing their inventories. According to the U.S. Census Bureau, manufacturing and trade inventories in February of this year edged up almost five percent from a year ago. (Source: U.S. Census Bureau, April 12, 2013.)

Businesses often build up inventories in anticipation of demand, but looking at consumer sentiment and retail sales, I highly doubt that’s the case. It’s actually the opposite; business inventories are increasing because of a lack of demand.

Think of what happens to the GDP if consumer spending declines further from here.

In the draft version of the International Monetary Fund’s (IMF) World Economic Outlook, the IMF states that it expects the GDP of the U.S. economy to grow 1.7% this year. This forecast is 15% lower than the IMF’s previous growth estimate of two percent GDP. (Source: Dow Jones Newswires, April 11, 2013.)

In the last quarter of 2012, the U.S. economy witnessed dismal growth and actually tinkered with contraction. Nothing has changed since then. Looking forward, economic conditions have worsened as consumer spending is in trouble.

All of this “bad data” will eventually trickle into the stock market. Corporate earnings of S&P 500 companies for the first quarter of 2013 are expected to show negative growth for the second time in the last three quarters. I am very skeptical of any real growth in the U.S. economy this year.

Michael’s Personal Notes:

The threat of an economic slowdown in the global economy is increasing each day, but thanks to the optimistic stock markets flaring due to easy money, the threat goes unnoticed.

Copper stockpiles in the London Mercantile Exchange warehouses have reached a 10-year high. Since the beginning of this year, copper inventories have surged 84%. (Source: Wall Street Journal, April 11, 2013.)

According to the World Steel Association, steel demand in Japan is expected to decline (for the second year in a row) by 2.2% in 2013 and a further 0.6% in 2014. Similarly, the use of steel in the U.S. is expected to slow this year compared to 2012. (Source: World Steel Association, April 11, 2013.)

Other base metals, often referred to as “industrial metals,” are witnessing their demise as well. Consider the chart below of the Dow Jones-UBS Industrial Metals Index.

$DJAIN Dow Jones UBS industrial metals chart

Chart courtesy of

This index, comprising different base metal prices, has been declining since February and has shed more than 11% of its price. Base metals are used in many different industries, and if their demand slows and prices decline, then that’s not a great sign for the global economy.

Dear reader, it’s not a hidden fact: major economic hubs in the global economy are slowing down. In the U.S., we have high unemployment. Once-strong nations like Germany and France are being suppressed by an economic slowdown in the eurozone. Japan is in an outright recession. China’s economy is slowing, too.

After the economic slowdown of 2009, central banks in the global economy were able to inject significant amounts of money into their countries. Looking forward, what I do see happening is more central banks in the global economy resorting to even more paper money printing in the hopes to weather the economic slowdown.

Unfortunately, the economic problem at hand is slowing demand in the global economy; money printing will not change that problem.

Yes, gold bullion prices are under severe pressure now, but if central banks in the global economy turn to more money printing, then there will be an abundance of fiat currency in the system, and it will be the precious metals that will provide safety and stability.

A Note on Gold Prices:

Gold bullion prices fell sharply on Friday and again this morning. The media blamed the slowing Chinese economy and indications that the Federal Reserve would pull back on its $85.0-billion-a month quantitative easing program earlier than expected.

My opinion is that gold prices are correcting sharply after a multiyear bull market in the metal. Unlike the media, I don’t see gold entering a bear market. In fact, I see the current action in the gold pits as an opportunity. The “weak hands” that got into gold late are learning their lesson. I see a base forming for gold bullion prices.

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 that will hurt most when the air is finally let out of the housing market balloon will be those buyers that 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 coming crisis in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.