A Major Problem with This Quarter’s GDP Numbers

By Michael Lombardi, MBA for Profit Confidential

In its revised estimates of the gross domestic product (GDP) for the second quarter of 2013, the Bureau of Economic Analysis (BEA) reported that the U.S. economy grew at an annual pace of 2.5%, up from its previous 1.7%. (Source: Bureau of Economic Analysis, August 29, 2013.)

GDP numbers being better than before will send a wave of optimism through the stock market—I can just hear stock advisors saying “Buy, buy, and buy some more!”

But you can’t take these GDP numbers too seriously. When you look at them in more detail, there’s a major problem: consumer spending in the U.S. economy is not improving!

In the second quarter of this year, real personal expenditure in the U.S. economy (an important indicator of consumer spending) increased by only 1.8%. In the first quarter of 2013, this number rose by 2.3%! If we are hoping for economic growth, declining consumer spending is not a good start.

So what changed in the second quarter to boost overall GDP in the U.S. economy? Higher exports from the U.S. economy made a big impact. Exports increased by 8.6% in the second quarter, while in the first quarter they declined by 1.3%.

Many will say rising exports are a good sign, because we are producing more and selling more. But what this really gives us is proof that American companies are seeing sales rise abroad, but not here in the U.S.—in fact, it’s more proof that consumer spending in the U.S. economy is weak.

It has been well documented in these pages that companies in key stock indices are complaining about consumer spending in the U.S. economy. That’s why I think U.S. GDP will surprise on the downside in the third quarter.

While presenting his company’s second-quarter earnings, the chairman and CEO of Foot Locker, Inc. (NYSE/FL), a key consumer goods stock, said “Sales in the second quarter were more challenging than we planned for, especially in the United States…” (Source: Foot Locker, Inc., press release, August 23, 2013.)

And demand for durable goods, excluding transportation, declined 0.6% in July after rising for three consecutive months! (Source: U.S. Census Bureau. August 26, 2013.)

Based on the available facts, it doesn’t look like the U.S. economy is on the right path. Consumer spending, the most important ingredient for economic growth, is missing.

Michael’s Personal Notes:

What kind of return should investors expect from the key stock indices the day after the last weekend of summer?

Here’s some insight.

In the 23-year period from 1990 to 2013, the highest return achieved by the Dow Jones Industrial Average on Tuesday after the Labor Day weekend was on September 6, 2005, when the index rose 1.35%. The lowest return it has provided to investors was a loss of 4.05% on September 3, 2002. (Source: Stockcharts.com, “Past Data,” last accessed August 29, 2013.)

If we take out the top and the bottom returns for the day, then the average return for the Tuesday after Labor Day weekend on the Dow Jones Industrial average is actually flat.

In the last 23 years, the Dow Jones Industrial Average has provided positive returns on 13 Tuesdays after Labor Day weekend and negative returns on 10 of them. Hence, there is only a probability of 56% that investors will see positive returns by investing in the Dow Jones Industrial Average this coming Tuesday—not worth the risk at all.

Dear Reader; the returns provided on the Tuesday after Labor Day weekend shouldn’t be your focus. But this weekend is very important to key stock indices in another way.

The period between Labor Day weekend and the Thanksgiving holiday is considered to be the busiest for the stock market…and one of increased volatility for key stock indices. Trading volume pours in as those who were away for vacation usually come back and traders get serious. Most of the major moves in key stock indices we have seen over the past 23 years have been during this time.

Over the summer, many risks have built up for key stock indices.

Eighty-five companies in the S&P 500 have already provided negative guidance on their corporate earnings for the third quarter—a startling 82% of all the companies that have issued earnings outlooks so far. (Source: FactSet, August 23, 2013.)

And we continue to hear noise about the Fed tapering quantitative easing in September. On those fears, we have already started to see key stock indices in the emerging market slide lower. It’s not a hidden fact anymore; quantitative easing played a very important role in getting key stock indices to the high level they are at today. Pulling back on that money printing is very risky as far as the stock market is concerned.

Going into the Labor Day weekend, I realize more and more: key stock indices have risen on the Fed’s unprecedented monetary stimulus (five years of artificially low interest rates and trillions of dollars in new money printed). But now we have dismal economic growth and the anemic corporate earnings that accompany it. Sooner rather than later, this stock market will experience a regression to the mean. Be careful about this market.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in Profit Confidential, August 27, 2007. A dire prediction that came true.