List of Seven Troubles Assailing the US Economy as We Head into Summer
The following is not simply a list of negative risks to the economy but a list of of serious economic conditions that are already placing drought-like pressures on the overall economy. This list doesn’t include the long-term structural problems with the economy, such as its high debt burden, but just the forces that have risen against it this year.
- First-quarter US GDP growth slowed to a stagnant 0.7% (annualized) — stagnant in that population growth alone should cause GDP to rise more than that. So, really, GDP per capita is in recession, though that is not technically how a recession is called.
- Moody’s just downgraded China’s credit rating for the first time in thirty years, warning of fading financial strength as economy-wide debt mounts. Moody’s attributed the growing risk to years of credit-fueled stimulus, indicating the Chinese economy has grown reliant on stimulus. China’s debt was growing at an annualized rate of $4 trillion (30% of GDP)! China’s efforts to contain stimulus bubbles are expected to inhibit its economic growth, which will bring down the global prices of commodities like iron, copper and oil with similar collateral impact in the US to what we saw last time commodities like oil crashed. The Shanghai Composite stock index has fallen about 10% in less than two months. (Recall the damage China did to global stock markets from the summer of 2015 through early 2016 as the Chinese market melted down and China had to socialize most of its own stock market to save it from utter ruin. Today the Chinese government market saviors rushed in to prop it up again.)
- The Federal Reserve appears to be set on lowering Fed stimulus, while it is also becoming clear that no fiscal stimulus will come out of the federal government this year. Even those working on Obamacare and the Trump Tax plan say early 2018 is the best they can now hope for. The Fed has a track record of killing recoveries by remaining headstrong on stimulus retreat once it starts down that path. Markets don’t like uncertainty, and everything investors have been banking on looks increasingly uncertain at the moment. With no fiscal rain at at time when the streams of monetary stimulus are drying up, this promises to be a dry summer. If the Republican-led house and senate become even more divided, just remember Lincoln warned, “A house divided against itself cannot stand.”
- The stock market has stopped rising, and the breadth of stocks that are rising against those that are falling has slowed to a mere trickle. Only a few stocks performing very well are keeping indexes afloat. Other than the five fabulous FAANG stocks, the market has been receding since March. Correspondingly, the number of stocks still trading above their 200-day moving average is growing quite narrow. The volume of advancing issues on a fifty-day moving average has fallen sharply. Price momentum has stalled. These are all traditionally fairly sound signs of a market top.
The minute [markets] stop moving, a powerful, even if short-lived, impulse takes over to reevaluate, cherry-pick and average down. Even if you’re sure the story hasn’t run its course, it takes real moxie to remain exposed to the other side of trades you were very comfortably holding for the previous weeks and months. We’re all leery of getting caught in over-crowded trades…. This is a be nimble, very nimble, environment…. Traders will need skills that have atrophied over years. (Zero Hedge)
- Existing home sales started drying up rapidly in April, falling back 2.3% (measured in number of units sold). Home prices remain hot, in fact, spiking another 6.6%, as inventory of available homes remains slight but has started to build. The amount of time a house remains on the market jumped almost half a month just between March and April. That’s the way things get at the moment of climate change when buyers are unwilling to endure escalating prices and sellers are unwilling to lower prices. (March’s sales hit the same hot summit they last attained in 2007. Ring a bell as to what might come next?) Construction of new homes and sales of new homes also plunged in April. New-home sales fell 11.4% from a nine-and-a-half year high. These drops imply a hit to second-quarter GDP, where housing plays a major role, but it remains to be seen if April was a one-off or an inversion in the housing climate.
- Bankruptcies are on the rise where it matters most. The Southern District of the bankruptcy courts of New York, which includes all the major national and international businesses headquartered in Manhattan, saw a sharp rise in Chapter 11 and Chapter 15 cases. Chapter 11’s tripled in the first quarter while Chapter 15’s shot up seven-fold in. A lot of this is due to the all-out crash of major brick-and-mortar retail. Millions who are laid off in this collapse will not find jobs at highly automated Amazon, which is replacing brick and mortar stores. (And what will be the knock-on effect as anchor stores in malls close, strongly impacting the customer draw to malls for smaller retailers?)
- Auto sales also dried up, down 8.2% from their December peak. For over a year, I’ve been warning that auto sales would wither in 2017. Desperate tactics that made sales great during 2016, I pointed out, would lead to a major failure this year, exactly as happened during the financial crisis when automakers teetered into or to the brink of bankruptcy at the same time as home owners. Ford just fired its CEO due to failing sales and is slashing 10% of its global work force (cutting about 20,000 employees, about half in the US, offsetting the 700 Ford jobs Trump recently saved). Even Ford’s mainstay truck sales are down. US automakers have, exactly as I predicted last year, entered an auto recession.
There is a fair amount of high pressure building that could mean a withering el-niño summer for the economy during a time when Fed relief, which the economy has grown dependent on, is drying up while fiscal refreshment is going to remain distant. As additional pressures build against the economy in the next week or two, I’ll add to the end of this list at The Great Recession Blog. So, you may want to check back.
Total household debt now exceeds the peek it hit just before the economic collapse into the Great Recession hit. While the number of households is also up, wages are correspondingly down, so households have maxed out … again:
Total U.S. household debt was $12.73 trillion at the end of the first quarter of 2017, up $473 billion from a year ago, according to a Federal Reserve Bank of New York survey. Total indebtedness is now 14 percent above the 2013 trough of household deleveraging brought on by the 2007-2009 financial crisis and Great Recession. The previous peak, in the third quarter of 2008, was $12.68 trillion…. Auto loan and credit card delinquency flows are now trending upwards, and those for student loans remain stubbornly high.” The survey showed lenders tightened borrowing standards for home and auto loans, a sign of their increased caution. (Newsmax)
While population rose about 7% between 2007 and 2014, wages for most people have dropped about 5% during that time. (The time frame of the graph above.) Those two changes roughly cancel each other out. With lenders now tightening borrowing standards for mortgages and auto loans out of caution, they are draining liquidity out of those markets. That may be contributing to the decline in those markets as listed above. Lowered liquidity at at time when we are hitting peak debt again are combined factors that will likely keep those markets down.
Housing and all other construction take a big drop as we move into June, following March’s rise:
U.S. construction spending recorded its biggest drop in a year in April as investment in both private and public projects fell…. The Commerce Department said on Thursday that construction spending tumbled 1.4 percent…. Economists polled by Reuters had forecast construction spending increasing 0.5 percent in April…. In April, private construction spending fell 0.7 percent, also the biggest decline in a year…. Investment in private residential construction fell 0.7 percent after six straight monthly increases…. Investment in residential and nonresidential structures such as oil and gas wells was one of the economy’s few bright spots in the first quarter. (Newsmax)
So, now, even one of the few bright spots is gone.
Share prices of the biggest U.S. banks reportedly are flirting with bear-market territory amid fears of weak trading revenues and fading hopes for President Donald Trump’s ambitious economic agenda.
“Goldman Sachs and Bank of America were among the biggest beneficiaries of the stock rally in the weeks after Donald Trump’s election victory in November, as investors looked forward to a profit-boosting mix of higher interest rates, lower taxes and lighter regulation,” the Financial Timesreported.
“But some of those underpinnings have fallen away since then, as Trump’s early setback over healthcare policy cast doubt over his ability to implement other promised reforms,” the FT explained….
Bank analysts have been switching “blue-sky earnings scenarios” of late last year with “more cloudy” outlooks…. Hopes of corporate tax reform happening any time this year have almost evaporated.
“Tax reform was difficult enough in 1986, when you had bipartisan support and an extremely popular president…. Without either, it always looked like a bit of a long shot.”
To be sure, in an even more disturbing sign, CNBC reported that the financial sector “just gave up all of this year’s gains, and some strategists say that’s sending the broader market a message about the health of the economy.” (Newsmax)
Pending home sales also just tanked, taking their biggest drop since August, 2014. Signed contracts fell 5.4% from a year ago.
Auto inventory are back up to their highest point since just before the auto crash in 2007:
With 935,758 unsold GM units collecting dust in dealer lots, this was the highest inventory number in 9.5 years, the highest since Nov. 2007, and, as Bunkley reminds us, “one month before the recession officially began.” (Zero Hedge)
That was April inventory. May’s inventory, just in, rose by another 30,000 vehicles.
The state of Illinois was just downgraded to the lowest credit rating ever given to a U.S. state (one mark above junk) by Moody’s and S&P. The downgrade is due to “unrelenting political brinkmanship [that] now poses a threat to the timely payment of the state’s core priority payments.” That brinkmanship is a just a microcosm of what is going on in the US congress. It is also due to “intensifying pressure from pension liabilities,” something congress hasn’t even begun to address with both government pension funds and Social Security and Medicare. Wait until that battle hits! If Illinois’ credit gets downgraded to junk, it’s financial problems instantly rise exponentially.
The retail apocalypse grows: Not even halfway through 2017, closures of retail stores have doubled last year’s closures as of this time and already exceed the last peak in closures during the crash of 2008. The bottom line is simple here. Commercial eal-estate investment trusts (REITs), malls, mortgage-backed securities (remember those), and their bankers are in a lot of trouble. The anchor stores are closing up the worst, which will pull others down in the wake by reducing traffic to malls. “Thousands of new doors opened and rents soared. This created a bubble, and like housing, that bubble has now burst.” According to Credit Suisse, 20-25% of US shopping malls will shut down within the next five years. While this is due to a paradigm shift in how people do their shopping, not just an overall reduction in retail sales, it will send shudders and close shutters throughout real-estate-based retail economy, having a huge impact on construction, land sales, banking, jobs, etc.
Things look even more perilous in the stock market at the CAPE ration, which measures how pricy stocks are in comparison to their ten-year average has just hit thirty, matching the rarified atmosphere of stock prices when the 1929 crash happened. The only time stocks have ever been more overpriced was just before the dot-com crash.
Albert Edwards, global strategist at French bank Societe Generale, said earnings reports for U.S. companies show that their overseas profits have grown but are still falling domestically. The decline may even point toward recession. “Domestic non-financial economic profits are really struggling badly and are still down 6 percent year-over-year,” Edwards said…. (Newsmax)
The US jobs market finally tanked, coming in at 138,000 new jobs in May, which is near the generally considered recessionary level of 100,000 new jobs. That’s a 32% drop from last month and is much lower than any economists expected (the average expectation being 185,000 new jobs). Even the insanely optimistic Ron Insana said the report could be a worrisome sign of a “pronounced economic slowdown,” according to Newsmax. Wage data was also softer than expected.
Insana offered a litany of economic omens: looming interest rate hikes, banks pulling back on extending auto credit, soaring housing affordability and softening inflation rates after briefly, and only briefly, touching the Fed’s 2 percent target…. “And, most important, consumer confidence has begun to dip….”
“With the Federal Reserve poised to raise interest rates again in June, today’s data notwithstanding, and scant fiscal stimulus loaded in the Washington pipeline, this could be the beginning of a worrying trend,” he wrote. (Newsmax)
When even Insana is starting to read bad news in the tee leaves, you know it’s getting hard to keep putting lipstick on this pig of an economy.