Heading for a recession

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.

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George Dagnino, PhD

Editor, The Peter Dag Portfolio

Since 1977 
Author, Profiting in Bull and Bear Markets

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1 comment:

Anonymous said...

It would be interesting to examine the relationship between the fall of workplace productivity improvements and the widespread use of cell phones, Facebook, internet, etc. In the workplace. It seems to have become a "right". What is the true cost of business distraction and interruption on productivity?