The Sub-2% Tipping Point Economy

The Sub-2% Tipping Point Economy

With so many candidates dropping out of the race, one has to wonder why the attraction of the ‘most-powerful’ job in the world is fading. Perhaps it is not wanting to stuck between the rock of the ‘broken-market-diminishing-returns’ of moar QE and the hard place of an economy/market that is sputtering and needs moar. As Bloomberg’s Rich Yamarone notes, There’s a little known rule of thumb in the economics world: when the annual growth rate of key U.S. indicators falls below 2 percent, the economy slides into recession in the next 12 months… and more than one of them is flashing red.

Via Bloomberg’s Rich Yamarone,

Real GDP growth was an annual 1.6 percent in the second quarter. It was last at 2 percent in the fourth quarter 2012, down from 3.1 percent in the third. In addition, real disposable personal incomes (0.8 percent), and real consumer spending (1.7 percent) flash warning signs. With GDP, they possess exceptional recession-predicting abilities. The reason is simple: like riding a bike, if you don’t pedal, you tip over.

Industrial production has the weakest history as an indicator, with growth falling below 2 percent on several occasions when the economy has avoided recession. The economics behind this is that the U.S., far from being a factory behemoth, is prone to manufacturing downturns.

Another rarely-cited statistic with excellent predictive qualities is the pace of real final sales of domestic product, which measures the level of goods produced in the economy that are actually sold rather than placed in inventory. The current 12-month pace is 1.6 percent. Alternatively, some economists look to the level of final sales to domestic purchases, which represents GDP less net exports and inventories.

These two indicators are often seen by Wall Street economists as preferred measures since they pertain to domestic demand, not what is produced or stockpiled. The year-on-year change in real final sales to domestic purchases is 1.5 percent.

Total consumer credit advanced by an annualized 4.4 percent during July, fueled by a 7.4 percent increase in loans for cars and student loans. The more meaningful household-sensitive component — revolving credit — contracted by an annualized 2.6 percent in July following a 5.2 percent decline in the previous month. During the last 12 months, revolving credit advanced 0.8 percent — essentially the same pace it has held since early 2012.

Consumer weakness was seen in the retail sales report for August as total sales inched up a lowly 0.2 percent or 4.3 percent from year ago levels. Heavy discounting and promotion resulted in contracting sales at clothing, sporting goods, and general merchandise stores. Once adjusted for inflation of 2 percent (July CPI), the real rate of retail sales is 2.3 percent — another measure with a history of predicting economic downturns.

CEO James Craigie of household products producer Church & Dwight recently remarked, “I’ve been a long-term pessimist about the business environment. The latest forecast of weak GDP growth, continuing high unemployment and weak same-store sales by major retailers provide little hope for significant near-term improvement in the U.S. economy… all consumer packages companies are fighting these headwinds.”

Retail sales at general merchandise stores — the second largest category of retail sales behind motor vehicles and parts — fell 0.2 percent month-on-month in August and 0.3 percent from August 2012.

These are all signs of a consumer-led slowdown.

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