Optimism about the US economic recovery is based on false data and ignores the far more conclusive report from the Economic Cycle Research Institute. The stock market has recovered, but the US economy is still on the floor and heading down.
The leading indicator’s index of this New York based independent forecaster has an annualized growth rate of minus 10.1 per cent, a level last reached at the end of 2008, and lower than anything seen in the second down leg of the 1980s recession.
This authoritative, independent data series allows only one conclusion, that the US economy is sinking fast and that government spending is not going to keep it growing in the near future.
Part of the problem is that US taxes are about to rise by $380 billion over the next 10 years, and that is equivalent to about two per cent of GDP annually. Thus tax rises will eat up any growth in GDP in this period of low growth.
US stock markets are pricing in rising corporate profits. But how can this happen if the economy is at best stagnant? A better-than-expected July trade deficit was still north of $40 billion, not the stuff of an export-led recovery.
It is already clear from cash retention and non-investment by companies that they are planning for a period of low or no growth. This will become a self-fulfilling forecast and is completely inconsistent with the rising profits needed to take share prices higher.
And it is also far from certain that the long period of low interest rates required to achieve traction in the US economy will actually be achievable. At some point the bond market will fall over, and interest rates will go up. Equities will suffer in this far from painless process.
Without cheap money there will be even more pressure on consumer and business spending and investment, and another downward screw on the US economy. Besides the stubbornly bad unemployment figures suggest that the US economy is not really showing much sign of recovery and is stuck in a deep hole.
The optimism that greeted the latest figures was misplaced as seven states did not actually file their data due to a public holiday. And let us not forget that the 473,000 initial claims for unemployment benefits are not far off the peak of the 2001-2 recession, and far too high for this stage of a so-called recovery.
Headline economic growth is already forecast to head lower in the second half, and it is hard to see where a recovery might come from after that. This will feel like a double dip recession, whether or not it actually is one, and stock market optimism is clearly misplaced right now.
Presumably at some stage economic indicators will reflect this state of affairs, and the ECRI index will not be ignored. The figures for US housing are still indicating a deep recession, nothing has changed there. The stock market rally is a nonsense.
Futures on the VIX are priced at a near record. The last time this happened was May 2008, two months after Bear Stearns collapsed and before a 40 per cent stock market crash.
Disclosure: No positions