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The Economy In Pictures: Weakness Continues

  • Written by Syndicated Publisher No Comments Comments
    May 19, 2016

    As we begin to wrap up the 2nd quarter of the year, I thought it was time to revisit the economy as the backdrop against expectations for stronger economic growth, rising inflationary pressures and an increase in interest rates and expectations.

    While there is currently a plethora of commentary strongly suggesting that the U.S. economy is nowhere near recession, it should be remembered the economy has NEVER been in a recession until future negative data revisions revealed it to be the case. Unfortunately, for investors, by the time a recession is widely recognized and accepted by the mainstream media and analysts, it will be far too late to do anything about it.

    As I have stated many times in the past:

    “Recessions are coincident with market declines ONLY IN HINDSIGHT. The reason is due to the annual revisions to past economic data that only reveal the start and end of the recession after the fact. (The chart below shows this effect.)”

    SP500-NBER-RecessionDating-040416

    Importantly, recessions are not the driver of financial markets, but it is the market that ultimately drives recessions.  This is why the Federal Reserve is so focused on keeping asset prices elevated in order to mitigate a loss of consumer confidence which would push the economy into a recession.

    As shown above, in a number of cases over the past century, a bear market in U.S. stocks was well underway long before a recession had been recognized. This is why waiting for the confirmation of a recession, before taking actions to protect your investment portfolio, will likely too late.

    With the economy now more than 6-years into an expansion, which is long by historical standards, the question for you to answer by looking at the charts below is:

    “Are we closer to an economic recession or a continued expansion?”

    How you answer that question should have a significant impact on your investment outlook as financial markets tend to lose roughly 30% on average during recessionary periods. However, with margin debt at record levels, earnings deteriorating and interest rate spreads narrowing, this is hardly a normal market environment within which we are currently invested.

    If you have any questions, or comments, you can email me or send me a tweet:  @lanceroberts


    Leading Economic Indicators

    LEI-Coincident-Lagging-051616

    LEI-6mo-Change-051616

    LEI-Leading-To-Lagging-051616

    Durable Goods & Capacity Utilization Rates

    Durable-Goods-051616

    Durable-Goods-Core-Capex-MOM-051616

    Capacity-Utilization-Ratio-051616

    Investment

    GDI-Real-051616-2

    GDI-Real-051616

    Private-Investment-GDP-051616

    ISM Composite Index & Transportation

    ISM-Composite-051616

    Cass-Freight-Index-051616

    Employment & Industrial Production

    Employment-FullTime-JoblessClaims-051616

    LMCI-FedFunds-051616

    Capacity-Utilization-Production-051616

    Retail Sales

    Retail-Sales-051616

    Retail-Sales-Credit-DPI-051616

    Inventory Ratios

    Inventory-Sales-Ratio-051616

    Retail-Sales-InventoryRatio-051616

    PCE & Imports

    PCE-Imports-051616

    Corporate Profit Markets vs. Valuation

    Profit-Margins-SP500-051616

    The Broad View

    Economy-6-Panel-Chart-051616

    If you are expecting an economic recovery, and a continuation of the bull market, then the economic data must begin to improve markedly in the months ahead. The problem has been that each bounce in the economic data has failed within the context of a declining trend. This is not a good thing and is why we continue to witness an erosion  in the growth rates of corporate earnings and profitability.  Eventually, that erosion combined, with excessive valuations, will weigh on the financial markets.

    For the Federal Reserve, these charts make the case that continued monetary interventions are not healing the economy, but rather just keeping it afloat by dragging forward future consumption.  The problem now is the Fed has opted, by tightening monetary policy, to not “refill the punchbowl.” Eventually, when the drinks run out, the party comes to an end.

    The markets, falling inflation indicators, and plunging interest rates are all suggesting the same.


    Lance Roberts

    lance_sig

    Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, and Linked-In

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Real Investment Advice

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Real Investment Advice: Bringing the complex world of politics, economics, investing and personal financial wealth building to you in simple, easy and informative way.

    Real Investment Advice is the home of the daily blog and weekly newsletter from Lance Roberts, Chief Portfolio Strategist for Clarity Financial. If you want to understand how money and the economy really work, this is your place to start.
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