We are now seeing clear signs that the US is moving back towards a recessionary territory.
The first quarter US GDP data showed the US economy growing at an annualized rate of just 2.5% (3.0% was expected).
The only reason growth was even this high was because the Government understated inflation, recording a GDP deflator of 1.2%. This is bizarre given that the “official” inflation data point, the Consumer Price Index or CPI, is currently pegged at 2.1%.
Had the GDP number been based on the CPI, first quarter GDP would have been just 1.63%. And had it used real inflationary data, it would have been even lower than that.
We get additional confirmation of a slowdown in the economy from corporate revenues.
Corporate profits can be manipulated in a variety of ways. This is why I tend to ignore profits when assessing the state of the economy.
Revenues on the other hand cannot be fudged. Either money comes in the door or it doesn’t.
With that in mind, only 45% of companies in the S&P 500 have beaten revenue estimates for the first quarter of 2013. This is down from 66% in the fourth quarter of 2012. And it’s well below the average of 50% for the last five quarters.
We addressed the trend of missing revenue forecasts in older articles. That trend remains intact with recent revenue misses coming from:
· Proctor and Gamble
· CB Richard Ellis
· American Express
This does not bode well for the economy.
Taken as a whole, corporations in the S&P 500 are expected to see a decrease in revenues of 0.3% in 1Q13. Yet against this slowdown, analysts believe we’re going to see a 6% increase in revenues for this year! Unless the global economy absolutely erupts higher, the market is far too optimistic about the state of affairs in the world.
We get additional indications of a looming recession when we remove the “deflator” aspect of GDP entirely and simply look at nominal GDP change (not adjusted for inflation) on a year over year basis.
When you do this you get a clear picture of a looming recession. Every time the rate of change for nominal GDP breaks below 4, a recession hits. As you can see in Figure 1 below, we’ve just broken this level.
Against this economic slowdown, stocks are priced quite richly. There is a word for when markets are totally disconnected from reality: it’s a bubble.
Investors take note, now is the time to be preparing for a market correction.
For insights on how to prepare for one visit us at: