The Weak Recovery Is Slowing Again, And The Market Is Headed Much Lower
According to extensive research by Reinhart and Rogoff, past credit crises were invariably followed by many years of below average growth, high unemployment, sluggish economic expansions and numerous recessions. In practice their studies were recently reinforced by Japan’s two-decade period of sluggish growth and the current tepid recovery in the U.S. In our view, working our way out of the mountain of debt, both private and public, that was incurred during the boom will take many years to come and will keep a solid lid on overall gains in the stock market.
The current economic recovery remains in sharp contrast to any other expansion of the post-war period, and is now showing definitive signs of petering out once more. The recently reported first quarter GDP is a mere 1.3% above the amount reached at the peak of the last cycle in the fourth quarter of 2007. In eight previous post-war expansions, GDP had increased by an average of 13.3% in the 17th quarter following a peak, with the lowest being 10.5%.
Now, even this tepid recovery is slowing down once more. In the last two months the overwhelming weight of the evidence supports this view, as the following indicators have either come in below expectations or suffered an actual downturn: core durable goods orders, the Chicago Fed National Activities Index, new home sales, existing home sales, payroll employment, the NFIB Small Business Index, construction spending, the ISM Non-Manufacturing Index, the Kansas City Fed Index, the Philadelphia Fed Survey, industrial production, the Empire State Manufacturing Index, the NAHB Housing Index, the ADP payrolls, auto sales, real consumer spending and the GDP. Weekly initial unemployment dropped this week after rising for three weeks, although the four-week moving average remains high. The only real outlier appears to be the ISM manufacturing Index, which came in above expectations. At most, we think the economy will be disappointing in the period ahead.