The
good news no strategist can refute is that income and spending are growing at a
healthy pace: about 4%. This is very good news. It justifies the elevated
consumer optimism for the economy, according to the University of Michigan. It is
also driven by employment expanding at a 1.99% y/y pace.
Add to this rosy
picture housing prices appreciating at a strong pace – up 5.8% y/y. These are
incredibly positive facts. The problem I have is that everything else is
gradually collapsing.
Corporate profitability is sinking. Cutting costs and recessions are the likely
outcome. Inventories out of line with sales, which are declining, will force
business to keep cutting production. Auto sales, as we predicted, have peaked.
This sector will be a major headwind for the economy.
Housing is beginning to
follow the sluggish performance of autos. Productivity growth is almost zero
percent. Capital investments, needed to expand capacity and improve productivity,
are sinking.
The sobering implication of this little understood measure is that
all the increase in people employed is not helping to improve the wealth of the
nation (increase the economic pie).
All the employed people are just creating
enough goods and services needed to survive. No more, no less. If we do not
produce more efficiently through education and improved investments, we are
just running still.
It is no coincidence the model of the Atlanta Fed is saying
the economy has hardly been expanding: +0.1% in Q1 (see above chart).
The expected
decline in profits in Q1 and Q2 is another somber reminder we are facing a
scary economic environment.
An environment where the least fortunate will voice
their discontent and demand more from a society increasingly more confused by
the lack of focus of their leaders in solving their economic and financial problems.
The widely heralded increase in minimum wage is just a momentary panacea
intended to calm the populace and give the impression something substantive is
being done to improve their livelihood. But it is just a palliative.
The business cycle is alive and well.
Investment implications will be discussed in depth in the next issue of The Peter Dag Portfolio.
You will encourage my timely update of this blog on the economy and financial markets by entering a subscription to The Peter Dag Portfolio.
Thank you for visiting this site.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
Author, Profiting in Bull and Bear Markets
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