I wrote an article on the April 2, 2011, suggesting that the U.S. economy is still growing in the region of 1.5%-2%. I made some predictions of coming data. Nearly all of the data points have now been reached, so I wanted to update the position.
Data have all been soft, but this was expected. It is the unwinding of poor seasonal adjustments and warm winter weather. All of the second-tier data, that is not seasonally adjusted, have held reasonably steady. I rely on the Steven Hansen website www.econintersect.com for updates on the data:
May rail carloads are steady (from Econintersect):
- carloads down 2.8% year-over-year (compared with down 5.5% last month)
- intermodal (containers or trailers on railcars) up 3.5% year-over-year (compared with up 3.6% last month).
- total carloads plus intermodal down 0.0% year-over-year (compared with down 1.5% last month).
As you can see the data for May is better than the data for April.
Trucking is slightly down. From Econintersect:
The American Trucking Associations' trucking index fell 1.1% month-over-month in April 2012 following a 0.6% rise in March. Compared with April 2011, seasonally adjusted tonnage was up 3.5%. Please note that the ATA does not release an unadjusted data series where Econintersect can make an independent evaluation.
But adjusted (yuch!) is up 3.5% from last year.
Containers through Ports were down in April. From Econintersect:
Container counts are continuing to show the economy is struggling to make headway as the economically intuitive imports are up only 2.8% year-over-year and 0.8% year-to-date. There is a direct linkage between imports and U.S. economic activity. Even exports (which are an indicator of competitiveness and global economic growth) are at record levels yet only up 1.3% year-to-date - but actually contracted 1.0% year-over-year. On a month-over-month basis, exports declined 3.4%, while imports declined 10.2%.
Bank lending and money supply are still rising.
Link to this article by the California Beach Pundit for the full details.
So bank lending data are remaining strong.
In my original article I suggested that the data points for the U.S. economy would reach the present position, without there being any underlying deterioration in the economy. This is still my stated position. The second-tier data, shown above, have overall (in my opinion) softened slightly. Any further softening would mean that the economy is deteriorating in a material fashion. However to come to that conclusion, the data would have to turn down first. The monthly employment figures are worse than originally guesstimated. I would expect, if Europe is kicked further down the road, that the employment data will stabilize at these levels (both weekly and monthly data). The various ISM data points still need to fall further to reach my predictions. I expect this to happen and will not be concerned when they do. If either national ISM falls below 50, the economy will clearly have worsened.
The European predictions have all also been realized. To deteriorate further there will have to be either:
- An insufficient response by the ECB and the European heads of states.
- A response that heightens the tension and forces the first defection from the euro.
If things are going to deteriorate further, I think that the first option is the more likely. My best guess is that the deterioration will stop as some policy action will be forthcoming. There may be a period of indecision, whilst a compromise is worked out. This will kick the can down the road until the Autumn. If a defection happens then all bets are off. It becomes impossible to predict what will happen next.
In the absence of eurogeddon, my best suggestion of the position going forward is for a very slow, but steady, deterioration of the economy from here. This article by Steven Hansen sums up the main reasons. If per capita disposable income is falling, it is likely that the economy will struggle. For each of the last 2 months over 100,000 people have fallen off the extended benefits program. This slow but steady squeeze will weaken the economy. With all of the problems around the world, I cannot presently see the counter pro-growth forces. We are left with money printing and this is weak policy in a zero interest rate economy.
We are about a month away from the second-quarter results season. The current position is that earnings are projected to be up 7.4% from a year ago. Read this article from CNBC for an update (dated June 2). Earnings projections are coming down slightly for the market as a whole, but are being revised up for financial firms. Financial firms had a very bad second quarter in 2011, making the comparisons easier. Overall earnings are unlikely to be much of a positive or negative factor.
Assuming no major fallout from Europe, I would expect the market to trade sideways to down in the period to September. I do not expect an imminent recession. That will be saved for 2013. The question will be - when do markets start to price it into valuations? Not just yet would be my guess.
I have just finished reading "When Money Dies," by Nial Ferguson. It is both an interesting and informative read.
Additional disclosure: Long RWM, RIMM, USD/JPY, various UK corporate bonds
Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.