U.S. Economic Weakness Is Starting To Show

Includes: DIA, SPY
by: Jeremy Robson

I have been consistently saying that the U.S. is still in a slow growth economy of approximately 1.5-2% real GDP on an annual basis. Despite the perpetual bulls on CNBC and some on Seeking Alpha (the California Beach Pundit is the most bullish) quoting the employment numbers as the greatest reason to get bullish on the economy, we are starting to see some data points that are showing the slow growth economy. I wrote an article here that includes some of the more obscure data that is suggesting this low growth scenario. However now some of the headline data is starting to show weakness. In particular in the last 3 days we have had:

1. Durable goods orders down 4% headline 3.2% core. You can try and explain this away using the expiration of the 100% tax write off incentive, but it may not be so.

2. Case Shiller house prices index down 3.7% for December. Don't know how you talk this one away (although I did hear one commentator suggest that the data is too old to worry about).

3. ISM manufacturing down from 54.1 to 52.4 with almost all of the internals also deteriorating.

4. Despite great weather personal spending only up 0.2% and personal income up 0.3%.

5. Construction spending down 0.1% (despite the weather). I am sure that the bulls will find a way to explain away this number (I am looking forward to the reasoning).

To be fair, bullish economic data has been seen in the regional PMI data, the employment numbers and the bank lending figures. However the data over the last 3 days has just highlighted for me the slow growth economy. It does not look like recession yet but it is clear to me (but not to the bullish commentators) that it is not a strong economy.

You may ask why this is important? Well if the U.S. economy is still in slow growth mode, despite a budget deficit of $1.3 trillion, zero bound interest rates and monetary stimulus, it is not in any shape to withstand any external pressures. Unfortunately this is exactly what it appears to be getting, with Europe in recession and several Asian economies slowing markedly. The ECRI repeated it's recession call for the first half of 2012, which they suggest may become visible by the summer of 2012.

The stock market remains on a liquidity driven tear. However to date, this has been accompanied by some good U.S. data to give the markets a tailwind. However if the data starts to disappoint, it will be interesting to see if the liquidity is enough to keep the market marching ever upward. There is a lot of market commentary that any falls in the market will be met with buying by investors who have missed out on the rally so far. The intimation here is that any pullbacks are a buying opportunity. Along with all the other silly bullish stuff around, this is a nonsense. If the data clearly turn down the market will not go up unless there is further QE (and even this may not do the trick). It will certainly not attract a whole host of new buyers if the recession call by the ECRI is correct. I would urge caution for longer term investors. If the data continues to deteriorate, this market is very vulnerable to a sustained drop, not just a pullback. If however the last 3 days weak data is just a passing slow spot (which it may be) the market will be able to move higher.

The data over the next 2-3 months will be very important to give a clear picture of the economy. As I have suggested before, the stock market is not a good predictor of the economic outcome when the outcome is complicated and unclear. It only acts as a good measure in times when the outlook is easy to discern. I would therefore not get too hung up on the fact that the market is going up now, as a reason to suggest that the economy is improving. Looking at and analyzing the data without any bias will give you a much better read on the economy and help with investing decisions.

The S&P500 (1370) and the DOW (13,000) are both at significant resistance points. If they break these, we will likely see further gains. However it is debatable whether they will be lasting gains or a good shorting opportunity.

Disclosure: Long RWM

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.