This is as Good as it Gets for the US Economy

This is as Good as it Gets for the US Economy

This is as Good as it Gets for the US Economy


The US economy is not in recession yet, but it is moving in that direction.

The news Friday that Q-2 US GDP expanded by only 1.2% from the prior Quarter (annualized) marks a major change in growth.

The last 2 years we have seen a pattern of a weak Q-1, followed by 2nd and 3rd Quarter rebounds, with 4th Quarters on the weak side. This cycle was a kind of mini-inventory cycle within the larger business cycle.

Businesses have been told to expect the economic acceleration, so they built inventories in anticipation of growth never came. It appears now that US businesses may have reached their limit of credulity when it comes to US Fed forecasting.

There was no inventory build in Q-2, inventory subtracted 1.2% from GDP in the Quarter. As did almost every other investment category.

Intellectual property (IP) was the lone exception. That is not comforting when one considers the nebulous nature of that sector.

The media universally reported the inventory GDP subtraction in positive terms, meaning inventory contractions are followed by expansions of production to build them again.

“Consider it another triumph of robotic article generation, read algorithms copying what has been said in past articles, ignoring the context.”

It is often true that inventory contractions are followed by increases in production, but not when inventory/sales ratios remain elevated even after a contraction. And slowing of inventory accumulation has not yet reduced those ratios to levels associated with recovery and certainly not enough to warrant an increase in production.

The more important investment categories were ignored.

GPDI (gross private domestic investment) contracted 9.7% from the Q-1, not good.

Year over year GPDI is now down 2.5% a number not seen outside recession since Q-2 of Y 1967, rare.

Even residential investment was down in the Quarter by 6.1%.

Housing starts and permits are down Y-Y and Case Shiller says prices have stopped rising.

Last week’s durable goods report certainly did not offer good news for the goods side of the economy, the report was bad from top to bottom, overall down 6.4% Y-Y.

All the negative economic news pushed the 10-yr US Treasury yield down to 1.45%, not as low as immediately after the Brexit vote but continuing a steep downtrend that started in mid-2015.

Real rates have turned negative all the way out to the 10-yr TIPS maturity which sits at Zero% as of last Friday, an indication that this is a real growth issue and not just about the lack of inflation.

Also, it is not coincidence that the USD peaked about the same time as the 10-yr US Treasury yield and real interest rates.

The US economy is not in recession yet, but it is moving in that direction.

The drop in investment is very concerning since it is investment that leads, consumption is a consequence of growth, not a driver of growth.

From Y’s 2012 to 2015 the economy grew at a 2.2% pace. With this Quarterly release and downward revisions to Q-4 of Y 2015 and Q-1 of Y 2016, we now have 3 Quarters running of 1% growth.

And no matter what you hear do not expect it to get better in Q-3, this could be as good as it gets.

Tuesday, US major stock market indexes finished at: DJIA -90.74 at 18313.77, NAS Comp -46.46 at 5137.73, S&P 500 -13.81 at 2157.03

Volume: Trade was moderate with about 916-M/shares exchanged on the NYSE

  • Russell 2000 +5.8% YTD
  • S&P 500 +5.5% YTD
  • DJIA +5.1% YTD
  • NAS Comp +2.6% YTD

Stay tuned…


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