Yesterday we had a very bullish nugget splashed across every financial news source. The Conference Board released it’s Leading Indicators index for June. June’s reading was an increase of 0.7% on top of an increase of 1.3% in May. The data further makes the case for the Bulls that the worst recession since the great depression is over and that we will experience recovery over the second half of the year.
As much as I would like to be on board with this thesis (ie an end to the suffering in our nation), I continue to find peculiar circumstances regarding most of the bullish data.
In this instance, let’s delve into the breakdown as far as the most positive vs. the most negative factors contributing to the overall reading. The positive factors contributing most were: Interest Rate Spread, Building Permits, and improvement in stock prices, whereas the biggest negatives were: lower money supply, economic outlook, and souring consumer expectations.
These positive factors are flimsy in their significance.
Interest rate spreads are a result of gov’t intervention to help a struggling banking industry and a large inflation premium due fears of hyperinflation taking hold, not a increase due a healthy and sustainable recovery, which is what typically happens.
Building permits show an increase in activity that will surely contribute to positive GDP readings in the next quarter and could spill a little into Q4. One question though, do we really need to be building anymore homes on top of all the inventory that we already have? Reasoning that this is a positive for the economy is being a bit myopic in my view. Building more homes will lead to increased inventories and further pressure downwards on home prices, something no one needs.
Stock prices, while they have improved substantially since early March have for the most part gone sideways (though we could possibly be in the process of breaking out of this trading range). Still, it seems that the 40%+ rally we’ve had thus has not done much in bolstering consumer confidence (see the latest ABC Consumer Confidence Survey).
Now for the Negatives.
Lower Money Supply places one of the integral parts of the economic recession to the fore. Cash is not moving from consumer to consumer (ie they are not spending, they are saving!!). The only thing that the Leading indicator tells me is that this problem is expected to continue.
A subdued Economic outlook and dimmed consumer expectations go hand in hand. If the outlook is looking dour (job losses, saving to rebuild decimated retirement nest eggs, lower home values), consumer expectations will be low, which will beget more saving and less consumption.
Remember that our economy is 70% comprised of the consumer. It seems to me that the negatives have more far-reaching implications than the positive ones.