U.S GDP Growth Falls 25%; What Happens Next

U.S GDP GrowthThe U.S. Commerce Department reported Friday that the American economy grew by a feeble 1.5% in the second quarter of 2012. This compares to GDP growth of 2.0% in first quarter, a decline of 25.0%.

The GDP growth in consumer spending in the second quarter was the lowest in a year! (My loyal readers know I have been saying since the spring that consumer spending in the U.S. was on the decline.) Last week, I also cited durable goods orders as being too weak to spur economic growth and consumer spending in any meaningful way.

For me, the most fascinating part of the U.S. economic growth report released Friday consisted of the revisions in GDP growth for the previous three years.

Obviously, although 2009 and 2011 were revised slightly higher, the big downward revision in 2010 caused the so-called economic recovery to be even worse than expected: GDP growth coming out of the financial crisis is lower than what was first reported.

Another downward revision:

For 2008-2011, real disposable personal income was revised downward; it was overstated to the tune of $163.2 billion! This means consumers have $163.2 billion less than previously thought!


I have been harping on the fact that with real disposable personal income not growing (but actually contracting), there is no way consumer spending can increase.

The Commerce Department’s revision downward to real disposable personal income means the consumer is worse off than first thought, which does not bode well for GDP growth or consumer spending for the remainder of 2012.

In 2010, the major contributors to the large downward revision were less capital spending by businesses in the U.S. and less consumer spending than first thought. Obviously, with real disposable personal income also lower than first reported, it is no wonder consumer spending came in lower than expected!

Capital spending was weaker in 2010 and continues to be weaker in 2012, because corporate profits were revised lower as well for 2009, 2010, and 2011. In total for those three years, initial reports from the Commerce Department had corporate profits overstated by $233.2 billion!

There’s no question, dear reader; this was a very weak quarterly GDP growth report. The downward revisions highlight the fact that the consumer is much worse off, with their real disposable income actually lower than previously thought. This is not going to help consumer spending going forward and will certainly not contribute to positive GDP growth.

Watch that stock market. Corporations will have a difficult time growing earnings and revenue in this type of environment.

Michael’s Personal Notes:

It seems a natural progression that the Chinese economy, being the largest buyer and miner of gold bullion, would eventually want to be a large global trader of gold bullion so that it can set the price of gold bullion like New York and London do.

The Shanghai Gold Exchange allows the trading of gold bullion, but its membership is limited to only a few investors. Now, the Shanghai Gold Exchange is proposing to move gold bullion from the exchanges to another platform, which would open the accessibility to banks and major investors around the world. (Source: Financial Times, July 19, 2012.)

The Chinese economy tends to be a more closed place where access is limited for institutions around the world. This opening up to banks and investment houses around the world is significant for the Chinese economy.

The proposed changes may go into effect as early as August 31, 2012, and would make gold bullion the first commodity to trade on this platform in the Chinese economy.

China can now say that the price of gold bullion that will be set on this platform can be used by people around the world as reflective of the price of gold bullion people can quote, similar to the prices set in London and in New York. China’s argument will be that the platform is open and readily accessible to anyone in the world.

This is China’s aim and the country is certainly taking the steps in its attempt to achieve this goal; we’ll see how the rest of the world responds.

Hong Kong is the portal to the Chinese economy. As a consequence of the insatiable demand from China that I’ve been reporting in these pages, dear reader, Hong Kong is set to open a new gold bullion vault in September of this year. (Source: Bloomberg, July 26, 2012.)

The state-of-the-art vault will have the capacity to hold 1,000 metric tons; roughly one-quarter of all of the gold bullion in Fort Knox. Since London, New York, and Zurich were the only other major storage facilities for gold bullion, Hong Kong will now join the club; the timing ties in perfectly with China’s desire to trade gold bullion openly.

For the Chinese economy to want to be a major player in gold bullion means that China views gold bullion as an important commodity: the only one it would place on this new platform.

It reflects the importance China places on gold bullion and also illustrates that, in spite of the fact that the world economy could fall into a recession, the Chinese economy will continue to be a strong buyer of gold bullion.

It’s nice to know that there is a major buyer waiting to step in and buy gold bullion on any dips. I would suggest following in China’s footsteps.

Where the Market Stands; Where it’s Headed:

“U.S. Profit Streak Hit By Global Weakness,” is a headline story in The Wall Street Journal today. Toronto’s Globe and Mail carries a similar headline on the front cover of its Monday business page: “Europe Woes Hit Revenue at U.S. Firms.” This is something we started warning you about in Profit Confidential months ago.

Europe’s struggling economy is transporting a recession to North America. China’s Shanghai Composite Index (the country’s main stock market gauge) has now fallen to a low not seen since April 2009—over three years ago! China’s in trouble, too.

Sure, investors and analysts are waiting for the Fed to announce another form of quantitative easing with the hopes it will bring stock prices higher. But aside from intervention by the central bank, there are no other events happening in the marketplace to justify higher stock prices.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in Profit Confidential, March 20, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.