Watch out for falling rocks! That's what we believe the latest Leading Economic Indicators Index is warning of. If stocks, also a leading indicator, had not already priced in some degree of trouble, we would change "rocks" to "stocks." That said, it seems enough economists, strategists and investors of all sorts are still betting on a decent recovery, and so falling stocks remain a strong possibility as well.
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The Conference Board's Leading Economic Indicators Index slipped 0.2% in June, offering yet another critical sign that the economy faces real risk of double-dip recession. The 0.2% drop compared against a revised 0.5% increase in May's measure. Economists were on target with their estimations, and so the news did not shake the market on Thursday. Rather, more positive testimony from Chairman Bernanke helped restore shares that were drained on Wednesday's commentary from the same.
Two out of the last three months produced declines in the LEI, and the positive drivers of the index continue to leave us less than enthused. They remain interest rate spreads, which are mostly due to prospective efforts of the Fed in its low-rate policy, and due to the dearth of demand for financial securities and borrowing instruments, especially in housing where mortgage rates are at historic lows.
Another positive factor for the LEI remains money supply, which of course has been driven by efforts of the Federal government to spur economic growth. These activities (rate reduction and capital creation) are supposed to spur economic expansion, but there's no guideline to how long it might take before American businesses and individuals take advantage of financing opportunities. That's not to mention that the government has been moving in the other direction lately, due to its politically inspired mania about budgetary issues. We share those concerns, but see continued need for expansionary actions in the short-term.
Meanwhile, lenders are not necessarily lending all this capital at low rates, given their hard lessons learned over the past few years and due to tighter regulation. While those are two good things for long-term stability, they do not help the economy in this transitionary period out of recession. Thus, with shelves now restocked; underemployed America keeping its money belt tight to hip; with European demand for goods waning; and European spending here in the States sharply cut back on soft euro exchange, we see little reason to expect government spurs to move the horse.
Suspect Drivers of the LEI
Meanwhile, the Average Workweek declined, illustrating that the previously growing manufacturing sector is about out of steam. Manufacturers' Orders gained just slightly in June, coming off a drop in May. Average Weekly Jobless Claims deteriorated, showing American businesses are in no hurry to add to workforce. Supplier Deliveries slipped, showing the shelves are full and sales are waning. Building Permits inched higher, but we already saw that the increase came mostly from the smaller multi-family segment, versus the more important single-family home segment. We know from recent housing reports that the now expired housing stimulus had propped up an otherwise nonexistent housing market. All this while foreclosures continue to flood into inventory, and threaten supply as well as pricing.
Stock prices also fell in June, and the stock market is illustrating a clearly confused and concerned state of affairs. Investors are perhaps starting to finally buy into the likelihood that any recovery would be a slow one. In other words, look for an L-shaped market to complement the economy, versus the hopeful V that traders seemed to be betting on through 2009, though off panicked lows. The Index of Consumer Expectations reportedly increased in June, but we have seen clear destruction in consumer confidence through the good part of July.
The Coincident Economic Index was flat in June, showing the stalling we've been pointing to. With the Lagging Economic Index having risen in June, the ratio of the two, which can be looked upon as a leading indicator as well, also deteriorated.
"...slow growth at the current low levels of economic activity, represents a still horrid economic scenario."
We find confirmation of our concerns in June's Leading Economic Indicators Index. We find it difficult to understand why most economists and strategists continue to expect economic growth, but we are taking note of an increasing number of strategists getting on board the slow-go scenario. There is one important factor that supports the growth case, and that is that for economic contraction to occur on a sequential quarter basis, things would have to get nearly as bad as they were at the bottom. Considering that we reached historically low economic activity at that bottom, and that the level of activity was especially dramatic due to a state of panic, the mere numbers support the case for slow growth. That said, slow growth at the current low levels of economic activity, represents a still horrid economic scenario. Make no mistake of that.
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