The US Economy - Back To The Slow Lane Again
FORECASTS & TRENDS E-LETTER
1. 4Q GDP Revised Lower, Not Surprisingly
2. US Consumer Confidence Fell in February
3. Housing & Manufacturing Took a Hit in January
4. President to Downsize Military, Smallest Army in 75 Years
Late last year, President Obama predicted that 2014 would see “breakout growth” in the US economy. His optimism was not completely unwarranted since the economy grew by a healthy 4.1% (annual rate) in the 3Q of last year, driven largely by an unexpected surge in inventory rebuilding. Then in late January, the Commerce Department reported that the economy grew by a better than expected 3.2% in the 4Q.
A 4.1% jump in GDP in the 3Q followed by an above-trend 3.2% in the 4Q gave some forecasters, including President Obama, reason to predict that our anemic economy might finally be out of the doldrums. That was until last Friday’s second estimate of 4Q GDP, which was revised significantly lower to only 2.4%. That’s our lead topic for today, along with a look at some other recent economic reports that raise cause for concern.
Finally, we will look at some professional analysis of President Obama’s plans to significantly downsize our military in the next few years. If Obama and defense secretary Chuck Hagel get their way, the Army will be reduced to its lowest level in 75 years. Hopefully, Congress will stand up for our military, but in any event, you need to know what this president wants to do. Be sure to read the latest military intelligence analysis from LIGNET which appears later on.
4Q GDP Revised Lower, Not Surprisingly
Last Friday, the Commerce Department released its second estimate of 4Q GDP which was revised significantly lower. The “advance” estimate in late January showed the economy growing at a respectable rate of 3.2% (annual rate) following 3Q growth of 4.1%. However, in the second estimate, the government reported growth of only 2.4% in the final quarter of last year. GDP growth for all of 2013 was only a revised 1.9% according to the Commerce Dept.
While most analysts expected a downward revision from the initial estimate of 3.2%, Friday’s report showing growth of only 2.4% was below the pre-report consensus. Initially analysts blamed the weaker than expected GDP number on unusually bad weather late last year. But a closer look at the data shows that the weakness was not entirely the result of bad weather.
Specifically, consumer spending did not rise as much as initially reported in the 4Q, and exports were also adjusted lower as foreign demand for US goods was not as strong as previously thought. Thus, the latest downward revision to 4Q GDP diminished hopes for an early-2014 “breakout” in economic growth.
Last Friday’s report showed that consumer spending – which accounts for apprx. 70% of GDP – rose only 2.6% in the 4Q, well below the initial estimate of 3.2%. This further confirms that the significant buildup in companies’ inventories in the 3Q of last year was the big driver of GDP growth in the second half of last year. The drawdown of those inventories is expected to weigh on reported growth in the first three months of this year.
Consumer spending in the 1Q appears to be weakening. Already, the government has reported a slight drop in retail sales for January. Most analysts attribute the slowdown to the harsh weather and numerous snowstorms in January. But that is only part of the story.
Other recent economic gauges, alongside the downgraded GDP growth, have flashed warning signs. Measures of consumer spending, job creation, factory output and the housing market have come in well below expectations. While heavy winter storms and frigid weather in many parts of the country may have depressed or delayed some activity, the poor numbers are raising concerns about the underlying strength of the economy.
In the wake of last Friday’s disappointing GDP report, many economists have been revising their forecasts for 1Q growth downward. Given that the drawdown in inventories will be a drag on growth this quarter, many forecasters now believe that 1Q GDP growth will be less than 2%.
Perhaps that explains why President Obama is no longer predicting “breakout growth” in the economy this year.
US Consumer Confidence Fell in February
The Conference Board reported last Tuesday that its widely-followed Consumer Confidence Index fell to 78.1 in February from 80.7 initially reported for January and well below the pre-report consensus for a slight uptick to 80.8. Making matters worse, the Conference Board also revised its January estimate down to only 79.4.
[Note that in the chart above it appears that the Consumer Confidence Index went up last month; however, there is a small decline at the very end that is obstructed by the red arrow.]
Consumer expectations for economic activity over the next six months also dropped sharply to 75.7 from a revised 80.8 in January, originally reported at 81.8. However, not all the news in the report was bad. The Board’s Present Situation Index, a gauge of consumers’ assessment of current economic conditions, increased to 81.7 from a revised 77.3 in January.
The Conference Board explains that the split in these two indicators suggests that consumers believe the economy has improved, but they do not foresee it gaining considerable momentum in the months ahead.
While the consumer sector makes up apprx. 70% of the economy, households haven't been increasing their spending by much during this harsh winter. As noted above, January retail sales fell, and weekly store reports show shoppers didn’t spend much in the first three weeks of February.
Within the Board’s confidence survey, views on the current labor market were mixed in late February. Over 32% said jobs are still “hard to get” while only 13% said they expect the number of new jobs to increase just ahead. Over 20% said they expect fewer jobs just ahead.
Housing & Manufacturing Took a Hit in January
The severe weather in January took a toll on the housing sector. Housing starts and building permits both declined in January, and sales of existing homes also fell sharply. However, new home sales actually increased by about 40,000 units in January to the highest level since July 2008. No one is exactly sure why since the pre-report consensus called for a decline. Monthly new home sales figures are often quite volatile, so January’s numbers could be revised downward in coming months.
Sales of existing homes fell 5.1% in January, the lowest since July 2012. While most analysts blamed the decline on the severe weather in January, data from the National Association of Realtors showed that sales fell in all four regions of the country, including the West where weather was not a factor.
Meanwhile, mortgage applications to buy a home fell in late February to the lowest level in nearly two decades, according to a weekly survey from the Mortgage Bankers Association. The report is a clear sign of weakness in buyer demand heading into the usually busy spring housing season.
Higher interest rates have pushed home refinances way down from their boom levels, causing many banks to fire employees. Applications to refinance homes were expected to rise this year, but they are now down over 15% from a year ago.
On the manufacturing front, there was a significant decline in the ISM Index which plunged from 56.5 in December to 51.3 in January. The consensus called for only a modest decrease to 56.0, so the large decline in January was unexpected. Any number above 50 indicates that manufacturing is expanding, but a reading of only 51.3 suggests very little growth.
US manufacturing grew at a substantially slower pace in January as new order growth plunged by the most in 33 years, driving overall factory activity to an eight-month low. The January reading marked a second straight month of slowing growth from November’s recent peak reading of 57 – which had been the highest since April 2011. This suggests that the economy may be losing some of the momentum it had enjoyed in the second half of 2013.
The biggest red flag in the ISM report for January was the huge drop in the forward-looking new orders index, which fell to 51.2 from 64.4 in December. That 13.2-point drop was the largest monthly decline in that key component since December 1980.
Clearly, the US economy is slowing down, not breaking out as President Obama suggested late last year. How much more the economy will slow down remains to be seen.
President to Downsize Military, Smallest Army in 75 Years
President Obama’s federal budget proposal for FY2015 is being delivered to Congress today. While all of the details are not yet known, it is clear that the president wants to reduce our military significantly. The following analysis of the planned defense cuts comes from LIGNET.
The Langley Intelligence Group Network (LIGNET.com) is a Washington, DC-based service providing global intelligence and forecasting from former CIA, US intelligence and national security officers, drawing on an international network of experts and sources. Like Stratfor, LIGNET is highly respected around the world. I am a paid subscriber and highly recommend it.
US Hollows Out Defense Budget, Asks NATO to Take Up Slack
Defense Secretary Chuck Hagel’s austere vision of U.S. defense spending priorities, if approved by Congress, would slash the military to the size it was before the 9/11 attacks, rendering the United States far less capable of handling two wars at once. Few are praising the plan, which appears to assume that increased European defense spending will cover NATO’s growing security gap.
The Obama administration’s budget proposal would mean fewer soldiers, sailors, airplanes and ships and perhaps only two Army brigade combat teams able to deploy at any given time, a major reduction in readiness. The Pentagon proposal thus assumes a new era of security priorities while offering little reassurance to a world bristling with armed conflict and fraught with geopolitical hazard.
One mantra Chuck Hagel keeps repeating is “prioritization.” While it is beneficial to emphasize national security priorities, the world is a more dangerous place today than it was when Obama began his first term in 2009. There are so many security hot spots throughout the world, it is impossible to prioritize them all.
Despite these ominous signs, Hagel is touting his new cost-cutting program as “the first time in 13 years we will be presenting a budget to Congress that is not a war-footing budget.” The Obama administration seems to believe that if the United States does not use force, other countries will follow his lead and also refrain from using force…
In closing, one might get the impression from LIGNET’s analysis that the Pentagon actually wants to reduce its forces. Nothing could be further from the truth. It is President Obama who wants our military downsized. Hopefully, Congress will stop him.
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.