So You Think the Outlook is Good

As much as I don’t like to be a non-positive person, my pragmatic sense tells me to look at the reality of things. At this time, I think the media and our esteemed economic forecasters are determined to make stargazers and weather people look brilliant. There’s a media and political buzz of “Look at the Bull Market! Did you see home prices! Consumer confidence is UP!”

I’ll agree this is a complex matter for many but the reality is that it’s not rocket science or advanced mathematics.

Can We Trust These Forecasts

Granted things have been very tough since 2008 and that’s a long time … so any sign of improvement is encouraging. Add to this the distinguished economists who want to embellish the uptick because they contend that if everyday consumers and small to mid size businesses think the future is great, then they will buy and invest more … which will lead to their forecasts being self-fulfilling … and them being considered geniuses.

But this just doesn’t seem accurate or possible to a well-informed businessperson and they aren’t sure they can trust this hyperbole.

Some Facts

The reality is we’re still in the muck, and if one looks at the most recent data with a clear focus it gives one cause for serious concern.

The facts are that almost all the forward movement in the economy is now coming from consumers – whose spending is 70 percent of the economic activity. Wages have gone nowhere and are going nowhere for the foreseeable future, which means consumer spending will slow because consumers just don’t have the money to spend.

The end of last week the Commerce Department advised that consumer spending rose 3.4 percent in the first quarter of this year, which is a good thing. On the other hand, personal savings dropped to 2.3 percent from 5.3 percent in the fourth quarter of 2012. That’s the lowest level of savings since before the Great Recession, which is not a good thing. You don’t have to be a master financial adviser in economics to see this can’t go on very much longer.

Granted home prices are up. The problem is they’re beginning to rise above their long-run historical average. (Before the housing crash, they were significantly higher …  way above the long-run average.) So you need to be mindful and watch your money. We’ve been here before – the Fed is keeping interest rates and inflation artificially low, allowing consumers to get low home-equity loans and to borrow against the rising values of their homes. Needless to say, this trend, too, is unsustainable. And while mortgage loans are up, most have been for refi’s instead of new mortgages.

What about the stock market?

Many wrongly assume that a rising stock market leads to widespread prosperity. Over 90 percent of the value of the stock market — including 401Ks and IRAs — is held by the wealthiest  … the top 10 percent of the population

Moreover, the main reason stock prices have risen is corporate profits have soared and companies are buying their own stock in order to keep the false assumption there is demand for the supply. Some believe that profits are mainly up because corporations have slashed their payrolls (and job creation) and are keeping wages low. This brings us back full circle, back to the fundamental fact that wages are going nowhere for most people.

What About Profits? The Sequester?

Not even fat corporate profits are sustainable if American consumers don’t have enough money in their pockets. Exports can’t make up for the shortfall, given the terrible shape Europe is in and the slowdown in Asia.

So don’t expect those profits to continue. In fact, the new Commerce Department report shows that corporate profits shrank in the first quarter, reversing some of the gains in the second half of 2012.

And, keep in mind, the full effect of the cuts in government spending hasn’t even been felt yet. The sequester is going to be a huge fiscal drag starting in August, if not July.

My goal is not to be a naysayer. But if this was a weather forecast, I believe the weather person would be warning you to get an umbrella and look for that raincoat … or maybe to buy a storm shelter …  you may need them sooner than you think.

© Phil Hoffman 2013. All rights reserved

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Tags: Economic, Forecast, Market trend

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