Stock Market Pricing-in a Recession?

U.S. Economy Close to Technical RecessionBy no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.

I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.

Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.

I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple reason that they don’t have money to spend.

The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.

But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.

I, for one, will not be surprised to see another decline in U.S. GDP in the second quarter of 2014. (But it might take another three revisions by the government to get the true story out…just like 1Q GDP.)

For economic growth in the U.S. economy, we need consumer spending. While I don’t have data yet for the month of June, consumer spending in the first two months of the second quarter (April and May) is worrisome.

Consumer spending, adjusted for inflation, declined in both April and May. The month-over-month decline in the real consumption expenditure in the month of April was 0.18% and 0.08% in May. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 27, 2014.)

Dear reader, it only takes two negative quarters of GDP for the U.S. economy to be in a technical recession. Don’t buy into the mainstream view that first-quarter GDP was negative because of poor weather conditions. The quarter we just finished doesn’t look any better for the U.S. economy.

Why do I make such a big deal of us entering a recession again? Consumer confidence in the U.S. economy is pathetic. Once they hear the economy is in a recession, consumers will tighten that wallet even further.

About that stock market, since it is a leading indicator, could the market already be pricing in a recession for the U.S. economy? After all, if we did enter a recession again, the Fed would likely have to change its policy and start printing money again…something both stocks and gold love. Maybe that’s why they are both rising in tandem this time.