“Economic Recovery” Theory Debunked

 bear market rallyAnother economic indicator comes in weaker than expected, throwing more cold water on the economic recovery theory.

Consumer credit increased in February 2012 at the slowest pace in four months, coming in at only $8.7 billion for the month. Estimates were for a $12.0-billion rise!

I want to focus on revolving consumer credit, which mostly measures the amount of credit card debt in the U.S.—a better reflection of consumer spending, as it removes student loans and car loans from the numbers.

The latest numbers from the Federal Reserve show that credit card borrowing was down $2.21 billion in February and down $2.95 billion in January. Economists were expecting a rise in credit card debt—consumer spending—for both months, which makes this a significant miss and once again puts the economic recovery into question.


Thus far in 2012, credit card growth is contracting, not expanding, which means there is less consumer spending. Of important note, this was the largest drop in a year in consumer credit, which means that the pace of slowing consumer spending is accelerating.

Since the crisis began, consumer credit has yet to return to 2007 levels. Consumer credit is currently 18% below that level!

Since consumer spending is 70% of gross domestic product (GDP), this does not bode well for the economic recovery many people say we are experiencing in 2012.

Consumers are either paying down existing debt, are unable to afford to expand their credit card debt because of the poor jobs market, or are not confident enough in their near-term prospects to take on new debt through consumer spending.

I would further argue that, with real disposable income falling, consumer spending has no choice but to contract, because incomes are not keeping up with inflation. These contracting consumer credit numbers further confirm this line of thinking.

Let’s not forget that, against the backdrop of contracting consumer spending, student loans outstanding are over $1.0 trillion for the first time in American history. Car loans also continue to expand at a rapid rate.

I’m that concerned student loans and car loans are too easy for students and consumers to get in 2012. With the difficult jobs market, many students hope an education will better their job prospects, so they are forced to return to school with a student loan.

Car loans at almost zero interest rates are another way to make a consumer feel wealthy and maintain consumer spending habits. However, if true wealth is not being created through an economic recovery, how can such consumer spending be maintained?

Consumer credit card debt is contracting, which illustrates how weak consumer spending is and how weak this economic recovery is. Just because it is easier for consumers to obtain a student loan and/or a car loan, doesn’t mean it is a reflection of consumer wealth. (Also see: Consumer Stress Levels Reach Highs Not Seen Since 2009.)

Watch out for what they tell you about that economic recovery, as I haven’t seen it yet.

Michael’s Personal Notes:

Small businesses are a critical part of the job creation that occurs in the U.S. Small firms accounted for 48.5% of the job creation in 2011, and 51.6% of the job creation year-to-date (source: ADP).

Since many are saying that an economic recovery is taking hold in the U.S. (which means job creation is only going to improve in 2012), I thought I’d revisit the small business index to see if this economic strength and job creation were being reflected there.

The National Federation of Independent Business released its latest index readings—for March—that fell to the lowest level since November of 2011! Furthermore, its Expectations Index, which measures small business confidence in the next six months, dropped two points below February’s reading, further questioning how job creation will occur in this country.

Not only are these readings not exhibiting any strength, but also these 25-year historically low readings are more commonly found during recessions!

As with last month’s survey, which I wrote about in these pages, the number one concern among small business owners going forward continues to be poor sales visibility.

Small business’ number two concern is inflation; the biggest jump in inflation concern since 2008!

Small businesses are concerned about commodity prices. As large businesses are saying that margins are being squeezed by commodity prices and Profit Confidential’s readership says inflation is a problem, we should all stop complaining, because the Federal Reserve says such inflation pressures are transitory…

Is this the backdrop for a strong jobs market and job creation?

More and more of small businesses have said they were going to stop lowering prices, while many more have raised prices and will continue to raise prices because of the rising inflation they are experiencing. These higher prices mean that the consumer will be paying more for goods and services in this weak economy!

The number of small business owners making capital expenditures fell in March, reversing the small gains made in January and February. The capital expenditures level fell to the lowest level since 2010. If small businesses are not confident enough to invest—capital expenditures—then how can job creation occur in this country?

In the last four months, the number of small businesses that said they were going to create new jobs has continued to fall. How is the jobs market going to improve with these kinds of statistics and where is the job creation going to come from? (Also see: Pathetic Job Numbers Expose Fake Economic Recovery.)

The above is a blatant warning to those who believe what the mainstream media is telling us about the supposed economic recovery in the U.S. Small businesses are disagreeing with what we have been told about the economic recovery. And since small business is a large part of the job creation in this country, I’m going to listen to what small business is saying.

Where the Market Stands; Where it’s Headed:

A huge top is being put in right now for the stock market.

For our technical analysis readers, the right shoulder formation of a head-and-shoulders pattern is almost complete. For our fundamental readers, the bear market rally in stocks that started March of 2009 is getting close to the end of its cycle.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.