The Inevitable U.S. Recession; Part II Starts

interest ratesThis past month of May was the turning point for the global economy.

Just look at these statistics and you can’t help but think the bottom is falling out again…

Manufacturing sank to a three-year low in May for the 17-member European Union.

The economic contraction in Europe is not only hitting the southern countries like Spain, Greece and Portugal, but it is now also infecting the strong countries like France and Germany.

Germany’s manufacturing output reading is indicating an economic contraction, not expansion; the same can be said for France. The reading in May was the worst reading for both Germany and France in three years!

Economic contraction in Asia: Chinese manufacturing fell in May for the seventh straight month!

If that doesn’t signify economic contraction, then how about the fact that manufacturers in China cut workers in May at the fastest rate in three years!

Economic contraction in America: the U.S. only created 69,000 new jobs in May. And when we tally the first-quarter earnings of the S&P 500, we discover that earnings growth for corporate American has slowed to a snail’s pace!

When the financial crisis hit in 2008, the world was grateful that China and India helped carry the world by providing economic growth. The European Union is now in a recession, but the above numbers point to the fact that the economic contraction is accelerating in other parts of the world.

In China, the slowdown there has not abated, but instead gathered momentum to the downside in May.

Economic contraction in India: first-quarter GDP growth in India, once a high-flying economy, came in at just 5.3%, the slowest rate of economic growth for India in nine years! While in 2011, manufacturing in India rose 7.3%, in the first quarter of 2012, it fell 0.3%!

This drop-off reflects the slowing manufacturing that is taking place in the European Union and China—further evidence of the global economic contraction.

These are very concerning numbers, dear reader. China, India, and the European Union are seeing their economies slow down very quickly…and America is not doing any better.

A global economic slowdown is the reality of the world today. However, with no country looking to take the lead to get us out of this slump, will the economic contraction lead to a global recession?

It is a very serious question with very serious consequences for stock markets around the world. But that’s where I believe we are headed again. (Also see: Economic History Repeats Itself.)

Michael’s Personal Notes :

Every economic rebound (from a recession) that America has experienced in modern history has been accompanied by a rise in real disposable income—how much people make after adjusting for inflation and taxes.

As I have written extensively, it is only with real income growth that we can achieve real economic growth.

The government tells us that the current inflation rate, as measured by the Consumer Price Index, is running at 2.3% per year. (If inflation was measured by readers of Profit Confidential, the number would be closer to 10%—that was the average estimate of 2,000 Profit Confidential readers we surveyed two months ago.)

Here is the obvious…

The real estate market, the pace of consumer spending (retail), corporate profits, and the economic recovery are all dependant upon real income growth.

If real wages—adjusted for rapid inflation and taxes—are not rising, then consumer confidence cannot gain any momentum, which means there cannot be economic growth, because consumers are not spending.

In April of this year, real wage growth once again put in a dismal performance. Since peaking in October 2010, real average weekly earnings—which are adjusted for rapid inflation—have fallen 1.2%!

Well, looking forward, it doesn’t bode well for consumer confidence or for wage growth—adjusted for inflation or not—to pick up any steam.

The U.S. consumer makes up 70% of the economy. There has been no structural improvement in the economy to help the average American. Millions of homes are underwater (their mortgage is more than their value), income taxes have not declined, and job growth has not been created. (See: May U.S. Jobs Numbers; Proof Real Troubles Just Beginning.)

Inflationary government borrowing, keeping interest rates at record lows for years and expanding the money supply will not help the average consumer if their earnings power continues to decline! In the long term, these measures will create rapid inflation, which will further hamper consumer spending.

In 2011, I said I was worried about going into 2012, because I thought it would be a very difficult year for the economy. Now I’m worried about going into 2013, because I think it will be even worse!

Where the Market Stands; Where it’s Headed:

Poor Alan Greenspan; he can’t get a break. On May 4 of this year, I published a story in Profit Confidential with the headline, “Greenspan Says, ‘Buy Stocks;’ I Say, ‘Run for the Hills!’” My story was about how earlier that week Greenspan said in an interview he thought stocks were a buy. Greenspan made the comments at the peak of the stock market for 2012. Since then, stocks have fallen about 10%.

The stock market has been quiet for the past two days, as traders and investors anxiously await the Federal Reserve’s comments from the upcoming meeting. Market participants want to know if the Fed will expand the money supply further.

Let’s get real. Interest rates will stay low for months to come until inflation becomes a real problem. QE3 will precede QE4, because, if the economy gets weak (which it is), printing money is the only alternative we’ve seen. For me, it’s not a matter of “if” for QE3, but “when.”

What He Said:

“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00-an-ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems that continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in Profit Confidential, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.