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June 29, 2013

Why we're headed for a double dip

By Richard Clark

As wages stagnate & shrink for most consumers, and interest rates rise, consumer spending will shrink. When interest rates increase, consumer spending declines because it costs the consumer more to borrow, so they step back from buying. Problem is, consumer spending is the backbone of any growth in the US economy. If it decreases, our economic growth prospects shrink, and this will eventually hurt corporate earnings & stocks.


(Article changed on June 29, 2013 at 00:41)

While mainstream economists were and are quick to believe that the US economy is growing, as the key stock indices suggest to them, the fact is . . that it isn't.   After the first estimates of gross domestic product (GDP) for the U.S. economy came out, a wave of optimism struck and stock markets rallied.   It seemed as if everything was headed in the right direction.

Not so.

In its third and final revision of GDP, the Bureau of Economic Analysis (BEA) threw cold water on all that.   It reported that the U.S. economy grew at just 1.8% in the first quarter of 2013 from the fourth quarter of 2012--that's 25% lower than its previous (second) estimates, when the BEA said the U.S. economy grew 2.4%.   Even worse, it's _28%_ lower from its _first_ estimate of 2.5%. (Source: Bureau of Economic Analysis, June 26, 2013.)

The primary reasons behind the decline in GDP growth are that domestic consumer spending and exports from the U.S. declined.

Going forward, as wages stagnate and shrink for most consumers,   and interest rates rise, it looks like continued dismal consumer spending for the U.S. economy.

Economics 101:   When interest rates increase, consumer spending declines, because it costs the consumer more to borrow, so they step back from buying.

Problem is, consumer spending is the backbone of any growth in the U.S. economy. If it decreases, our economic growth prospects begin to pale.

Reality Check:

What we have seen in the past few weeks are skyrocketing yields on U.S. bonds--suggesting that long-term interest rates are rising. The effects of this will eventually trickle down to places where consumers in the U.S. economy borrow in order to buy. Just one example of this kind of "place' is the automobile sector.

So consider this:   Car and light truck sales WERE on path to increase beyond 15 million units this year in the U.S. economy--whereas in 2009, they stood at 10.4 million. (Source: Wall Street Journal, June 26, 2013.)   But will consumer spending on cars be the same if interest rates on car loans start to increase?   Of course not.

And then there's the second major threat to consumer spending--unemployment and underemployment. In May, there were 1,301 mass layoffs in the U.S. economy, involving 127,821 workers, an increase of 8.5% over April. (Source: Bureau of Labor Statistics, June 21, 2013.) When a person is unemployed, their spending is of course down and large credit purchases like cars go by the wayside.

Even worse:   If consumer spending in the U.S. economy continues to struggle, it will start to show up in the corporate earnings of companies which are currently able to buy back their own shares and cut expenses to make their numbers appear better.   But looking at the prospects of anemic consumer spending in the U.S., it becomes apparent that this buyback is going to slow down and stop.

Conclusion:   The optimism of many economic observers is based on nothing but blind hope.   Once the hangover from the Fed's easy-money policies goes away, U.S. GDP numbers will turn negative.   And yes, that means back to recession.

Source of the information in this analysis:   Email from financial analyst Michael Lombardi, who has included me on his mailing list.

Submitters Bio:

Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've always been more interested in political economics and what's going on behind the scenes in politics, than in mechanical engineering, and because of that I've rarely worked more than 8 months a year, devoting much of the rest of the year to reading and writing about that which interests me most.