By Michael Lombardi
In 2013, the U.S. economy, as measured by gross domestic product (GDP), rose at an average rate of 1.9% compared to 2.8% in 2012. And as it stands, GDP may slow further in 2014.
What makes me think this?
In January, U.S. industrial production declined by 0.3% from the previous month. This was the first decline in production since August of 2013. Production of automotive products in the U.S. economy declined by 5.15%, and appliances, furniture, and carpeting production declined by 0.6% in the month. (Source: Federal Reserve, February 14, 2014.)
And factories in the U.S. economy just aren’t as busy as they used to be. The capacity utilization rate, a measure of companies using their potential production, was 78.5% in January. The average rate between 1979 and 2013 has been 80.1%. While a difference of two percent in factory utilization isn’t a big number, because overhead is often fixed in factories, a two-percent decline in production is a big deal.
Then there’s the inventory problem; inventories in the U.S. economy continue to increase. In December, inventories at manufacturers increased by another 0.5% to $1.7 trillion. From December 2012, they have increased by 4.4%. (Source: U.S. Census Bureau, February 14, 2014.)
We have a situation in the U.S. economy today where factories are working at lower capacity than they have historically, while business inventories are rising—two bad omens for the economy; hence, you can see why I’m concerned about economic growth in 2014.
It’s a domino effect …
Inventories increasing suggest consumer demand is stalling. Examples of consumer spending declining in the U.S. economy are many. As I have noted in these pages, we are seeing retail sales declining and big-box retailers closing down marginal stores.
And I’m not the only one who thinks U.S. GDP is going to decelerate further in 2014. According to the Federal Reserve Bank of Philadelphia, economists across the board are slashing their U.S. GDP growth forecast for almost every quarter of 2014. I’ve prepared this table for you so you can see the old and new GDP forecasts for the U.S. economy.
|Quarter (Q)||Previous Forecast (Q-over Q-Change)||New Forecast (Q-over-Q Change)|
Data source: Federal Reserve Bank of Philadelphia, February 2014.
When I look at the stock market, it’s almost as if investors are ignoring what’s happening in the U.S. economy. I think the nine-percent rise in the price of gold bullion this year tells us there is something wrong with the U.S. economy. Why else would investors be moving towards the safety of gold bullion?
Looking at the revised U.S. GDP growth forecasts, while they have been lowered, I think they are still optimistic, because it’s not just the U.S. economy that is seeing a slowdown. China, the second-biggest economy in the world, is seeing its economy weaken, too. The numbers of bad loans on the banks of China hit their highest level in two years in the fourth quarter of 2013. (Source: “UPDATE 1-China banks’ bad loan ratio hits two-year high,” Reuters, February 13, 2014.)
And troubles in the eurozone continue; the Italian economy, the third-biggest in the eurozone, improved by only 0.1% in the fourth quarter of 2013. See the chart below. The size of the Italian economy declined nine percent between the first quarter of 2007 and the third quarter of 2013.
A decline in the growth rate of the global economy affects the U.S. economy and U.S. GDP.
Big American corporations get “hit” when the global economy suffers. In the 2013 annual report of retail giant The Procter & Gamble Company (NYSE:PG), we see that only 39% of the company’s 2013 sales came from North America — the majority of its sales were from the global economy. (Source: “2013 Annual Report,” The Procter & Gamble Company, last accessed February 14, 2014.)
Bottom line: with the U.S. economy and the global economy growing at a much slower pace, large U.S. corporations will find it harder to achieve the earnings growth they did between 2009 and 2013. And their stock prices will reflect their slower revenue and profit growth in 2014.