This article was posted on Thursday, Aug 01, 2013

While the stock markets continue to rally, [also, the real estate market], due in large part to the Fed’s continued QE bond and mortgage buying, there are some troubling signs in the economic data. If we drill down a little deeper, we find that various important sectors of the economy have either been slowing down or failing to meet expectations, a condition that has shown no signs of reversing.

For example, real GDP has increased only 1.8% over the last four quarters, and within a range that has been in force since the first quarter of 2010. The current quarter is shaping up as only marginally better with the last estimate of 2.4%. Many economists are now lowering their GDP estimates for the second half of this year.

Manufacturing production has declined for the last two months and in three of the last four. Even vehicle sales, which recovered strongly from the recession bottom, have now flattened out for the last six months. The Chicago Fed national activity index, which covers a broad swath of the economy, showed deterioration in growth in April, and has been negative in three of the last four months.

Returning to the jobs front, we find that the four-week moving average of new weekly unemployment claims has moved from 338,000 to 353,000 over the past month. The ADP employment report for May came in far below expectations, and has averaged 124,000 new jobs over the last two months, compared to 203,000 over the prior five. The majority of Fed regional surveys found weaker hiring in May than in April. The National Federation of Independent Businesses (NFIB) recently reported reduced hiring in May.

The ISM manufacturing index of 49 for May was the lowest since June 2009, when the recovery was only getting underway. That number was even worse than it looked since new orders plunged 3.5 points while inventories rose. The ISM non-manufacturing index for May was down from a year earlier, and has not recorded a monthly increase since December. Moreover, its employment index component dropped from 52 to 50.1, its fourth consecutive decline.

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Consumer expenditures for April declined 0.2% and disposable income fell 0.1%. Compared to a year-earlier, real consumer spending is up only 2.1% and real disposable income only 1%. Consumers were able to maintain this lackluster rate of spending only by reducing their savings rate to 2.5%. Notably, the savings rate was under 3% in each of the first four months of the year, whereas prior to this year the rate had not been under 3% for any month since December 2007, the peak of the economic cycle.

Although there is a lot of talk about a stronger economic recovery, the facts, as outlined above, indicate otherwise. Furthermore, the effects of the sequester which started very slowly, are starting to become more evident in slowing wage growth and reduced hours. The original estimates of a 1.5% drag in GDP growth from the tax increase and sequester still appear to be valid and will likely be felt the most in the second quarter and third quarter.

A growing number of analysts believe that the overly optimistic earnings forecasts for the rest of the year will prove to be highly disappointing in reality. Although first quarter earnings slightly beat the consensus, revenues were flat, and corporations will find it exceedingly difficult to increase earnings with no help from revenues, which are likely to remain under pressure.

In addition, global growth is slowing with much of Europe in recession,Chinacoming in short of expectations and emerging markets weakening. As I have warned for the last several years, with the huge build up in federal debt and consumer debt, it would be difficult to generate a normal recovery in either theUSor the rest of the world. Even with the Fed adding $2.5 trillion of bonds and mortgages to its balance sheet since 2008, we still have prolonged sluggish growth with no end in sight.

So, is theUSeconomy rolling over to the downside? It certainly looks that way. Does that mean we are headed for a new recession? That remains to be seen. We’ll revisit the question of a new recession following the next report.

Oh, and one last thing: The government once again hit the debt ceiling on May 17, and the Treasury is now using “extraordinary measures” to allow the government to continue paying its bills. What, you didn’t hear about this? That’s because the media was largely silent.

[It is AOA’s position that as long as the Federal Reserve continues it’s massive bond and mortgage buying, the real estate market will remain stable with long term pressure on the upside.]

Gary D. Halbert is the president and chairman of Profutures, Inc.  Subscription rates for Forecasts & Trends is $197 for 12 issues and may be obtained by visiting his website at

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