Consumer Next Shoe To Drop As Wall Street Ignores Data "Decelerating Hard"

ECRI's Lakshman Achuthan spoke with CNBC Monday about the continuing cyclical slowdown in US economic growth that Wall Street continues to ignore. 

Stocks are zooming to new highs in recent months on "trade optimism" and a tsunami of liquidity via central bank money printing. 

Investors have taken their eyes off decelerating hard data that clearly shows manufacturing is in a recession, and the consumer could be the next domino to fall ahead of the holiday season. 

"The actual data itself is just decelerating pretty hard actually," Achuthan said. "I don't think we can remove recession risk from the table. It's still out there as long as you're slowing."

The chart below shows YoY industrial production growth in manufacturing is in a recession, already at a 3.5 year low. And real retail sales growth is falling simultaneously, indicating that the manufacturing slowdown has already transmitted weakness into services.

"On the manufacturing side, you have IP [industrial production] at a 3½-year low. It's deeply negative," he said. "On the retail sales front, you have deceleration."

Achuthan said the US economy is likely to continue slowing in the months ahead. There's no indication that a turning point in economic growth will be seen in 2019, as it's likely the consumer will continue to deteriorate. 

"All the hopes are the consumer is somehow going to rev up, and that's coinciding with the holiday season here," said Achuthan. "But when we look at all of our leading indexes that anticipate turning points in the US economy, it's not there yet. So, we have more slowdown to go."

ECRI's leading indicators first spotted the cyclical slowdown in growth in mid-2018. By October of last year, Achuthan made an inflation downturn call that signaled the economy was decelerating, way ahead of Wall Street, who figured out something was wrong with the economy when stocks crashed in December. 

And today, with a burst of poor US economic data, including last week's disappointing retail sales and dismal industrial production, the US economic surprise index has slipped back into the negative, further indicating the US economy is on a slippy slope into year-end. 

US GDP in Q4 is set to print at the lowest level in 4 years at around 0.35%, and would be only the fifth time in 42 quarters since the Q3 2009 exit from the recession when US growth has risen by less than 0.5% Q/Q.

The answer to the slowdown is 'Not QE', which has expanded the Fed's balance sheet by $288 billion in the past two months, a faster rate of increase than that observed during QE3.

As a reminder to the bulls, the S&P500 closed at new highs two months before the Great Recession began. Also, stocks hit their highs the same month that the 1990-91 recession began. And right after the 2001 recession began, stocks rallied 20% in a month and a half. 

Could the latest rally in stocks be the lead up to the next recession?