No matter what I hear about an “economic recovery” in the U.S. economy, I can’t, in all good conscience, trust it.
Consumers are not stupid. Why would consumers spend when they know the economic slowdown in the U.S. economy is worsening? Consumers only have to look at four things: the unemployment rate in the U.S. economy has been stuck above eight percent for more than three years; food stamp use is increasing (millions of people use them each month); a record amount of people are falling into poverty; and the S&P 500 companies are experiencing an accelerated slowdown in earnings.
Manufacturing in the U.S. economy is slowing down—hinting at a deeper economic slowdown. Durable goods orders in August dropped the most since January 2009 when the U.S. economy was facing recession. The U.S. durable goods order number for August came in 13.2% below July’s. (Source: U.S. Commerce Department, September 27, 2012.)
It’s no secret that Bank of America Corporation (NYSE/BAC) has been hurting since the economic slowdown that began in 2008; now the bank is planning to cut 16,000 jobs by the end of the year. (Source: Wall Street Journal, September 20, 2012.)
Similarly, with a slightly smaller cut of 700 jobs, Campbell Soup Company (NYSE/CPB) is planning to shut down two of its U.S. plants in an effort to cut costs. The business is facing declining consumption of its canned soup. (Source: CNBC, September 27, 2012.)
Other companies plan to cut jobs as well in the final quarter of 2012.
As I have mentioned in these pages before, the earnings of the S&P 500 companies over the past couple of years rose due to a rigorous round of cost-cutting. Now companies facing the economic slowdown in the U.S. economy don’t have many other options to keep earnings growth going. They will need to cut their workforces to show better results for their shareholders.
Looking at the broader picture, job cuts by big U.S. companies will have a major impact on the already fragile U.S. economy. Will the unemployment rate rise even higher as the economic slowdown deepens? From the looks of it, it is certainly possible, but don’t forget that the government statistics are skewed.
Each passing month, in the U.S. economy, people who give up looking for work drop off of the official unemployment number. That’s why economists like me like to look at the underemployment rate, which includes people who have given up looking for work and people who have part-time jobs who can’t get full-time jobs. That number, the underemployment rate, stands close to 15%, while the government tells us the official unemployment rate is 8.1%!
Warning signs of an economic slowdown in the U.S. economy are coming from all directions.
Where the Market Stands; Where it’s Headed:
In a month where the Federal Reserve finally announced the long-awaited QE3, the Dow Jones Industrial Average rose only 2.6%—a disappointing rally. After all, didn’t the Fed unleash an unlimited amount of mortgage-backed securities with QE3?
I have a very uneasy feeling about stocks going into October. The euphoria over the Fed’s latest round of quantitative easing has faded. Now it’s back to the problems in the eurozone, China’s slowing economy, and the quickly decelerating earnings growth of the S&P 500 companies. Reality is about to hit home.
What He Said:
“Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in Profit Confidential, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.