World Economic Growth Moving
from Slowdown to Contraction

So much for “muddling” along when it comes to economic growth worldwide…

China reported its fifth consecutive month of contraction when it released its March Manufacturers’ Purchasing Managers’ Index. During the past five months, the rate of acceleration in the economic slowdown has been increasing for its manufacturers (source: Markit Economics).

Within the numbers, new orders, which are a gauge of future economic growth, were at a four-month low. Also, the accelerating economic slowdown has pushed the index for manufacturers from an economic slowdown mode to actually contracting over the last two months.

As I’ve been reporting about China, there is clearly an economic slowdown occurring in the country. Not only is export growth slowing, but consumer demand withinChinais slowing as well—not a good combination.

The European Union reported its March Purchasing Managers’ Index as well, which showed a continued economic slowdown and came in below estimates. Manufacturing is shrinking at an accelerated rate. In the last two months, manufacturing in Europe has actually gone from an economic slowdown to contracting (just likeChina).

This is not a surprise when new orders within the index—a measure of economic growth—have been contracting for eight straight months. Unemployment has been declining for three straight months and that decline is—wait for it—accelerating.

Just to show that this is not symptomatic of just the weak countries in Europe, economists were hoping that Germany was going to escape the economic slowdown and post strong numbers. But this wasn’t meant to be.Germany’s Purchasing Managers’ Index for manufacturers for March came in at the lowest level in three months!

Germany’s index reported its first contraction in over four months. The report noted that new export business—a measure of future economic growth—slowed considerably. This is indicative of a continued economic slowdown going forward.

Since the Czech Republic and Hungary ship over half of their exports toEurope, their economies have been hit hard.

With China slowing as well, Australia, New Zealand, South Korea and Malaysia have all reported weaker economic growth numbers.

There is no question that the economic slowdown is gaining momentum and is prevalent around the world.

Can the U.S. escape this barrage of weak economic growth? Not a chance. It may take time to reach our shores, but it will eventually land, exacerbating the economic slowdown that already exists in this country.

So watch out for that stock market rally, dear reader; it is very vulnerable to this economic slowdown.

Where the Market Stands; Where it’s Headed:

As I have written above, inflation is getting out of control and economies around the world are going from slow growth to contraction—a lethal combination. Rapid inflation leads to higher interest rates. Slowing economies lead to weaker earnings for most public companies.

Stock markets do not rise when inflation and interest rates rise while economies contract—this gives more credence to my theory that we are simply witnessing an ongoing bear market rally the sole purpose of which is to bring more investors back into stocks before the next leg of the bear market starts.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S.economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S.economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S.will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard pressed to find another analyst predicting aU.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.