The following is not simply a list of negative risks to the economy but a list of of serious economic conditions that are already placing drought-like pressures on the overall economy. This list doesn’t include the long-term structural problems with the economy, such as its high debt burden, but just the forces that have risen against it this year.
- First-quarter US GDP growth slowed to a stagnant 0.7% (annualized) — stagnant in that population growth alone should cause GDP to rise more than that. So, really, GDP per capita is in recession, though that is not technically how a recession is called.
- Moody’s just downgraded China’s credit rating for the first time in thirty years, warning of fading financial strength as economy-wide debt mounts. Moody’s attributed the growing risk to years of credit-fueled stimulus, indicating the Chinese economy has grown reliant on stimulus. China’s debt was growing at an annualized rate of $4 trillion (30% of GDP)! China’s efforts to contain stimulus bubbles are expected to inhibit its economic growth, which will bring down the global prices of commodities like iron, copper and oil with similar collateral impact in the US to what we saw last time commodities like oil crashed. The Shanghai Composite stock index has fallen about 10% in less than two months. (Recall the damage China did to global stock markets from the summer of 2015 through early 2016 as the Chinese market melted down and China had to socialize most of its own stock market to save it from utter ruin. Today the Chinese government market saviors rushed in to prop it up again.)
- The Federal Reserve appears to be set on lowering Fed stimulus, while it is also becoming clear that no fiscal stimulus will come out of the federal government this year. Even those working on Obamacare and the Trump Tax plan say early 2018 is the best they can now hope for. The Fed has a track record of killing recoveries by remaining headstrong on stimulus retreat once it starts down that path. Markets don’t like uncertainty, and everything investors have been banking on looks increasingly uncertain at the moment. With no fiscal rain at at time when the streams of monetary stimulus are drying up, this promises to be a dry summer. If the Republican-led house and senate become even more divided, just remember Lincoln warned, “A house divided against itself cannot stand.”
- The stock market has stopped rising, and the breadth of stocks that are rising against those that are falling has slowed to a mere trickle. Only a few stocks performing very well are keeping indexes afloat. Other than the five fabulous FAANG stocks, the market has been receding since March. Correspondingly, the number of stocks still trading above their 200-day moving average is growing quite narrow. The volume of advancing issues on a fifty-day moving average has fallen sharply. Price momentum has stalled. These are all traditionally fairly sound signs of a market top.
The minute [markets] stop moving, a powerful, even if short-lived, impulse takes over to reevaluate, cherry-pick and average down. Even if you’re sure the story hasn’t run its course, it takes real moxie to remain exposed to the other side of trades you were very comfortably holding for the previous weeks and months. We’re all leery of getting caught in over-crowded trades…. This is a be nimble, very nimble, environment…. Traders will need skills that have atrophied over years. (Zero Hedge)
- Existing home sales started drying up rapidly in April, falling back 2.3% (measured in number of units sold). Home prices remain hot, in fact, spiking another 6.6%, as inventory of available homes remains slight but has started to build. The amount of time a house remains on the market jumped almost half a month just between March and April. That’s the way things get at the moment of climate change when buyers are unwilling to endure escalating prices and sellers are unwilling to lower prices. (March’s sales hit the same hot summit they last attained in 2007. Ring a bell as to what might come next?) Construction of new homes and sales of new homes also plunged in April. New-home sales fell 11.4% from a nine-and-a-half year high. These drops imply a hit to second-quarter GDP, where housing plays a major role, but it remains to be seen if April was a one-off or an inversion in the housing climate.
- Bankruptcies are on the rise where it matters most. The Southern District of the bankruptcy courts of New York, which includes all the major national and international businesses headquartered in Manhattan, saw a sharp rise in Chapter 11 and Chapter 15 cases. Chapter 11’s tripled in the first quarter while Chapter 15’s shot up seven-fold in. A lot of this is due to the all-out crash of major brick-and-mortar retail. Millions who are laid off in this collapse will not find jobs at highly automated Amazon, which is replacing brick and mortar stores. (And what will be the knock-on effect as anchor stores in malls close, strongly impacting the customer draw to malls for smaller retailers?)
- Auto sales also dried up, down 8.2% from their December peak. For over a year, I’ve been warning that auto sales would wither in 2017. Desperate tactics that made sales great during 2016, I pointed out, would lead to a major failure this year, exactly as happened during the financial crisis when automakers teetered into or to the brink of bankruptcy at the same time as home owners. Ford just fired its CEO due to failing sales and is slashing 10% of its global work force (cutting about 20,000 employees, about half in the US, offsetting the 700 Ford jobs Trump recently saved). Even Ford’s mainstay truck sales are down. US automakers have, exactly as I predicted last year, entered an auto recession.
There is a fair amount of high pressure building that could mean a withering el-niño summer for the economy during a time when Fed relief, which the economy has grown dependent on, is drying up while fiscal refreshment is going to remain distant. As additional pressures build against the economy in the next week or two, I’ll add to the end of this list at The Great Recession Blog. So, you may want to check back.