I hope you don’t think I’m being rude when I say that the latest economic data out of America sucks.
If I were an economist, I might say growth is “subpar.” Or perhaps “output is weaker than expected.”
But the truth is the U.S. economy is in bad shape. And I don’t mean it’s just having a bad hair day. Or that it got out of bed on the wrong side this morning. I mean it’s structurally weak and downright slumpy.
This is at odds with mainstream opinion. Tune into the talking heads on TV and you’ll get a very different story: one of rising stock prices, booming corporate profits and steadily falling jobless numbers.
This disconnect should come as no surprise. The news networks and the mainstream financial press earn money from corporate advertisers. It is therefore in their best interest to keep the illusion of prosperity alive. Without it, precious ad revenues will dry up.
First things first: The U.S. economy just registered a pathetic 1.8% annualized growth rate. To put that in context, economists consider a growth rate of 4% to 5% at this stage in a post-recession recovery to be normal.
Next: This growth rate wouldn’t be so bad, if it was happening without massive support from Washington and the Federal Reserve. But the key lending rate is at a highly stimulative 0.0% to 0.25%. And Washington is also effectively stimulating the economy by spending $1.5 trillion a year out of an empty pocket.
As analyst Henry Blodget put it last week:
1.8% GDP growth in the face of massive stimulus is the equivalent of your car sputtering down the highway at 45 miles per hour while you have the gas pedal floored. You might be glad that the car hasn’t broken down completely, but you certainly won’t conclude that all is well.
Jobless claims are another problem. New claims for unemployment benefits just rose to their highest level in January. That’s more people unemployed, not less.
In the week ending April 23, first-time claims rose to 429,000 from 404,000 the previous week. Economists had predicted claims would fall to 392,000.
So roughly 1 in 10 Americans are still out of work. And that’s despite every effort of the Washington and the Fed to reverse the situation.
So we now have slumpy growth and stubbornly high unemployment. Is there anything else in the mix?
Well, you might want to throw in rising inflation. Average U.S. gasoline prices are now $3.38 a gallon – that’s a roughly 40% increase so far this year.
At $4 a gallon, says ExxonMobil CEO Rex Tillerson, pump prices start to have economic and psychological effect. People begin to take buses more often and cut discretionary driving.
Broader inflation is ticking up, too. In March, consumer prices including food and energy rose 2.7% from a year earlier. And the cost of raw materials for America’s producers rose 16.4% over the same period…indicating more consumer price rises in the pipeline.
These rising prices don’t just affect American shoppers. They also put the squeeze on corporate profit margins…which in turn affects stock prices.
Just last week, consumer products giant Proctor & Gamble admitted it expected its input costs to rise three times more as it had at the start of the year. And it has jacked up the prices on brands representing about half of all U.S. sales.
Colgate, too, is raising prices thanks to increased input costs.
This is a big deal because rising corporate profit margins have been key to rising stock prices following the crash in 2008. With input costs on the rise, it’s hard to see those margin increases continuing for much longer.
This all spells one thing: another wipeout on Wall Street. It is impossible to predict when gravity will be brought to bear on stocks. But the omens certainly aren’t good.
This is the story the press isn’t telling you. But it is a vitally important one, if you earn, save or invest in U.S.-dollar denominated assets.
A truly global approach to investing is now more important than ever. Stay tuned…