No wonder stocks are struggling, says Capital Economics. “This is the weakest and longest economic recovery in US post-war history.” And it’s getting weaker. Last week the Federal Reserve sounded a more pessimistic note than in its last statement. The economic rebound is now simply proceeding, rather than getting stronger. Meanwhile, the rise in annualised first-quarter GDP was revised down from 3.2% to 2.7% as consumption proved less robust than initially estimated.
Retail sales also edged down in May. Consumer sentiment has rebounded, but is still at levels consistent with previous recessions. Bank lending has slumped by almost 25% in two and a half years, which is “truly scary”, says John Mauldin on Investorsinsight.com. He also reckons that the expiry of the Bush tax cuts next year could well be enough to send the economy back into recession.
Weekly initial jobless claims are stuck in a “sideways trend at elevated levels”, adds Action Economics. The ECRI weekly leading indicator index is now pointing to growth of just 0.8% in two quarters’ time. It has never fallen this fast in such a short time without a recession being imminent or under way. And the housing market “is going back into the tank”, says Gluskin Sheff’s David Rosenberg.
A double-dip in the housing market
Even allowing for the fact that government support for first-time buyers expired at the end of April, May’s new home sales were a shock. They fell by 33% to an annual rate of 300,000, the lowest since records began in the 1960s. Rosenberg notes that the only time new home sales reached a further low 11 months after a recession ended was during the double dip of the 1980s. New house prices are down 10% this year.
The supply overhang is such that, according to some estimates, it will take more than eight years of normal sales to clear the stock of houses held by banks, says The Economist. The “steady drumbeat of foreclosures” has continued. They’ve been running at 300,000 filings a month for 15 months. Demand is feeble, with mortgage applications for new homes 40% down on the end of April, even though mortgage rates have fallen.
But the housing market hasn’t hit bottom yet, despite the uptick early this year. Lower prices and continued foreclosures imply further losses at banks. That in turn will curb lending and restrict growth further. It won’t make consumers feel any better either.
Propping up a corpse
The bigger picture here is that the economy is weakening just as the stimulus is wearing off. It’s like the old film in which a corpse is propped up so that guests can go on partying, says Buttonwood in The Economist.
The trouble is that recessions after credit-bubble bursts are far nastier than the usual sort, says Rosenberg. Because deleveraging, or paying down the huge debt pile – a multi-year process – is the overriding trend, the recovery is “extremely fragile” and “beset by periodic speed bumps”.
Heading for deflation?
Combine deleveraging with falling prices, and the result is Japan-style deflation. We’re just one downturn away from this “quicksand”, says Albert Edwards of Société Générale. US core inflation is already at 0.9%, its lowest since 1961.
Despite the danger of a double-dip recession and deflation, the market is still pencilling in a growth rate of 3% in the second half. And it expects earnings to hit a new peak next year, says Rosenberg.
The nasty “growth relapse… at a minimum” that we are in for will be an unpleasant surprise. So US stocks, and thus their global counterparts, are set to hit the skids.