There is a growing sea of evidence suggesting the U.S. economy is in the dire state and the outlook is gruesome.
The Purchasing Manager Index (PMI), tracked by the Institute for Supply Management (ISM), shows signs of an economic slowdown in the U.S. economy. Activity in the manufacturing sector is now at the lowest since 2009. The PMI fell to 49.6 in August compared to 49.8 in July. (Source: Institute for Supply Management, September 4, 2012.). Any number below 50 indicates an economic slowdown—manufacturing has clearly stalled. Think again if you believe there is economic growth in the U.S. economy.
Economics 101 tells us that when there is economic growth; there is an increase in manufacturing—clearly not in this current U.S. economy.
Another hideous fact from the ISM data: inventories are building up. The ISM indicator that gauges inventory went from 49 to 53. That’s an increase of more than eight percent in a month.
In good times, building inventory voluntarily can be a good strategy for businesses to implement. This way they can fill in the orders on time and obviously avoid backlogs of orders—this also shows that businesses are confident about customer demand.
In the present case, the cause of inventory build-up is definitely not a spree of orders and backlogs. On the contrary, inventories are building up due to low demand. It’s because there is an economic slowdown and companies are not selling their products as fast—it’s not voluntarily.
Looking at the overall picture, the ISM data confirm my position that the U.S. economy is witnessing an economic slowdown. Manufacturing has slowed down, numbers of new orders are decreasing, backlogs are decreasing, and, to top it all off, inventories are increasing—the opposite of economic growth.
As I have been writing, the economic slowdown in the eurozone countries is creating a spillover effect around the world and especially into the U.S. economy. We are not immune to the global economic slowdown; China, European countries, and other countries are showing weakness in manufacturing and demand.
The only way the U.S. economy can see growth is if consumers here in the U.S. economy consume more. But weak consumer confidence and still-high job numbers show consumer consumption is a real struggle. With food prices rising and real personal income decreasing, consumers are too stretched to spend.
Where the Market Stands; Where it’s Headed:
The stock market couldn’t get what it wanted from the Federal Reserve (the official announcement of QE3), but it got news of more money printing from another central bank. The European Central Bank (ECB) said yesterday that it had a plan to buy the sovereign debt of distressed countries and the stock market took off.
The ECB calls it “Outright Monetary Transactions,” a big name for money printing. Problem with all this—Germany is not yet onboard with it.
Dear reader, as I have been writing through the summer, the stock market is simply trading on the anticipation of more money being pumped (printed) into the financial system. Stock market rallies cannot sustain themselves on increased monetary liquidity. Bull markets are built on structural improvements to the economy, because those improvements are permanent and long-term beneficial to the companies that trade on the markets.
Yesterday, it was reported that the jobless rate in Greece hit 24.4% in June. (Source: ELSTAT.) Unemployment for the 15-24 age group sits at 55% in Greece. Printing money until money is not worth anything will not help the one-in-four Greeks who are unemployed.
For the gold bugs amongst our Profit Confidential family of readers, some wise words from my fellow editorial colleague (and a gold bug himself), Robert Appel, BA, BBL, LLB:
“Mario Draghi stole the show yesterday morning with news that the ECB has a plan in place to buy bonds and support EU debt. It was not precisely the news everyone wanted—the mavens wanted immediate, unrestrained bond support and this plan has a lot of ifs, ands, and buts—but indeed it is a plan and the traders had been waiting patiently for a clear direction from the ECB.
“How ‘clear’ this is remains to be seen. We ask readers to recall that next week the German High Court rules on whether Germany can by law get involved in the debt of other countries. If the court agrees, you will hear no more of that issue. If the court declines, we think the markets will go into a tailspin.
“This also gives the Fed room to move, in their upcoming meeting, without being perceived as stealing headlines from the ECB.
“No change in strategy. After a year of wobbling, we are more convinced than ever that the gold mines are the place to be on a go-forward basis.”
What He Said:
“As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in Profit Confidential, November 21, 2007. A dire prediction that came true.