 |
Goldilocks had to deal with three big, bad bears, but she had it easy compared to the rest of us. That’s because I see five bears that are smiling hungrily at the economic recovery.
Worse, we’ll have to deal with all of them before we can see our way out of the financial woods.
Three of the bears are domestic. Two are international. And each is pretty intimidating in its own right. Combined, however, we’ve got a long way to go before the markets get to a point where they’re close to “just right” again.
Those five bears are …
Bear #1: The Jobs Crisis. Wall Street economists can point to all the indicators they want that they believe represent a rebound. But for most Americans, there is no recovery without jobs. And jobs are in a very unhappy place right now.
In fact, as this chart from the Calculated Risk blog shows, weekly unemployment claims recently increased to 386,000.
What’s more, the four-week average of weekly unemployment claims came in at 375,500. This suggests ongoing weakness in the labor market.
Part of this is due to lack of government willpower. As has been pointed out by people much smarter than me, Congress can borrow money for next-to-nothing now — 20-year Treasury rates are at record lows — and yet refuses to undertake the kind of big, public-works projects that would turn the jobs picture around, and which our crumbling infrastructure badly needs.
But part of the problem is also a big structural change. New technologies bring on an ever-expanding number of labor-saving, productivity-increasing, job-obsoleting applications. Humans are being replaced by robots, and our society hasn’t come up with a way to deal with that, at least not yet.
Bear #2: Manufacturing Remains Weak. The July Markit Flash U.S. Manufacturing Purchasing Managers’ Index on Tuesday showed the weakest improvement in 19 months in the U.S. manufacturing sector’s business conditions.
At a 51.8 reading, down from 52.5 in June, the headline index was the second-lowest since the PMI first signaled a manufacturing recovery in late 2009.
Clearly, U.S. manufacturing is struggling. With economic growth weaker than many estimates, I think we’ll be lucky to see any growth at all in third-quarter GDP. Is that the sign of a recovery? No.
Bear #3: Retail Sales Are Slumping. Take a look at this chart from dShort.com, showing real retail sales — or retail sales ex-gasoline — made using Federal Reserve Economic Data …
The good news is that retail sales (excluding gasoline) increased by 4.2% on a year-over-year basis. The bad news is that retail sales ex-gasoline decreased 0.3% in June from May.
It sure looks to me like consumers are starting to give up. This could be due to the chronic unemployment crisis, or rising gasoline prices, or a general lack of economic opportunity for all but Washington and Wall Street insiders.
We’ll have to see what the next month’s data brings. But another slump could bring us much closer to recession.
Those are the three domestic bears. Then we have two international bears …
Bear #4: Europe. Most of Europe is sliding into recession, and Germany can’t pull the entire economy by itself. One euro-zone member after another faces a ratings downgrade. Spain probably needs a BIG bailout, and soon. And Greece is likely headed for an exit from the euro as it slides into an economic abyss.
This is bad news for the U.S., as Europe is a major trading partner, and many S&P 500 companies do a lot of business in Europe. You know who it’s really bad for? Bear #5 …
Bear #5: China. The good news is that HSBC’s Flash China manufacturing Purchasing Managers Index (PMI) rose to 49.5 in July from 48.2 in June, the highest level in five months. So maybe all that central bank easing in China is starting to pay off.
The bad news is that Europe is China’s biggest customer. And as Europe slides down the slippery slope of economic decline, there will be less of a market for Chinese goods.
And then there’s China’s reported economic numbers. As I told my Red-Hot Global Resources subscribers in a recent live Web presentation, the problem is no one believes China’s economic numbers. Even China’s leadership doesn’t believe its numbers.
Heck, when Ma Jiantang, director of China’s statistics bureau, says that manipulation of financial statistics is the biggest source of corruption in the country, you have to take notice.
So let’s look at China’s recently reported GDP growth of 7.6% in the second quarter from a year earlier. That’s down from an 8.1% pace in the previous three months, but still, not bad.
Except that slowing imports and industrial production, as well as harder-to-fudge electricity usage data, points to much slower growth. That’s why analysts at big banks like Barclays think China’s real GDP growth was probably closer to 7.15%. That’s a BIG difference.
So, we’ll believe China’s economy is firing on all cylinders when we see it. Until then, it’s a bear sitting on the front doorstep of the global economy.
Is There Room for Optimism? Yes!
Not everything is terrible. Housing numbers, while not exactly showing that the real estate boom is back, are a lot less rotten than they used to be, as housing starts are actually up year-over-year. Industrial production is up, though not a lot. Miles traveled increased 2.3% in May.
If you’re a commodity bull, the ongoing drought in America’s breadbasket is bullish. Many people are calling a top in agricultural commodities now. Really? Look at this recent chart of the U.S. drought forecast from the National Oceanic and Atmospheric Administration (NOAA).
It sure looks like the drought is going to get worse before it gets better. That should keep a fire under food prices in more ways than one.
After all, China is by far the world’s largest importer of soybeans, with the U.S. as the main supplier. Do you think the Chinese will sit on their hands and watch the drought wither crops, or buy-buy-buy before prices really get high?
The heat that comes with the drought is also good for natural gas prices, as I told Red-Hot Global Resources subscribers in the recent live Web presentation. We are playing both the drought and natural gas in Red-Hot Global Resources right now.
The point is, there’s always a bull market somewhere, and there is always hope for a broad turnaround. But until these five big bad bears are taken care of, a real recovery may only be a fairy tale.
All the best,
Sean
