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Economic News Mid-May: Are We Heading For Another Recession?

So far this week, economic data has been mixed but even that is an improvement over the economic data announced over the past few weeks (see some of our previous summaries here and here). For this week, here is a quick recap of economic news and data releases so far:

  • Retail Sales Rise More Slowly. Following a 0.7 percent increase in March, April retail sales rose only 0.1 percent - its slowest pace of the year with sales of clothes falling but sales of vehicles rising. The overall slowdown is being blamed on the warmest March on record while Easter came earlier - meaning April sales are said to have come earlier than normal.
  • US CPI Remains Unchanged. The US Consumer-Price Index for April was unchanged thanks to a drop in energy prices while the core rate climbed 0.2%. It appears that some companies are holding the line or price increases in light of a weak employment market - which also tends to hold down wage gains.
  • Housing Starts Rise But Building Permits Fall. Homebuilders broke ground on 2.6% more homes than March's total with construction rising for both single-family homes and apartments. However, building permits, which act as a gauge of future construction, fell from a 3 1/2 year high while the rate of construction and the level of permits requested are still at half the pace considered healthy.
  • Factory and Industrial Production. Factory production rose 0.6% in April that helped to erase a 0.5% decline in March with half of the increase coming from a 3.9% jump in the production of motor vehicles and parts - the fifth consecutive gain at automotive plants and the largest rise since January. Overall industrial production rose 1.1% in April with output at mines and utilities also showing strong gains.
  • Jobless Claims Due Today. Today, initial and continuing jobless claims for the week that ended May 12 are due out and are expected to fall by 2,000 to 365,000. Any worst showing will weight down investors sentiment when the markets open later today.

However, Lakshman Achuthan of the Economic Cycle Research Institute is predicting that a recession is coming by the end of 2012 and he has noted that it takes half the year after a recession actually begins before there is a negative GDP number (unless a 9/11 or Lehman Brothers' shock event occurs). Achuthan has further noted that broad economic measures of output, sales, income and jobs are all turning downward - the signs of a recession is comes.

Moreover, it's worth remembering that at the end of this year:

  • The Bush taxes cuts will expire, sending income taxes, capital gains taxes and dividend taxes to much higher levels.
  • The "temporary" payroll tax cut expires.
  • Obamacare taxes kick - including new taxes on dividends (unless of course the Supreme Courts junks the whole laws).
  • Automatic government spending cuts, albeit limited as its $2 trillion spread over 10 years, will kick in.
  • There will be yet another debt ceiling debate.

And that's not even counting uncertainty over China's economic growth and the seemingly never ending European debt crisis.

So what should investors and traders alike do? Obviously business cycles are a natural part of the economy while stock market downturns can not only be good buying opportunities for long-term buy and hold investors but they can also produce profits for savvy traders. In other words, keep a close watch on your stock forecasts and probabilities as any market volatility will no doubt produce plenty of opportunities for profits.