Why These US Economic Figures Should Make Us Nervous

Phew! Glad October is over.

US stock markets had quite the month. The S&P 500 erased most of its year’s gains in one month. So did the NASDAQ and the Dow Jones.

Yet, while stock markets were tanking in October, US consumers remained quite optimistic about the markets.

That’s according to the latest Consumer Confidence Survey released by The Conference Board, at least.

According to the survey, courtesy of Barrons, 44.5% of consumers expect higher stock prices in the near term. And only 19.1% expect them to fall, these are the lowest levels since February 2007.

Consumers aren’t just confident about stocks, they are also positive about the future of the US economy.

According to the survey, consumer confidence increased again in the month of October from 135.3 to 137.9.

US consumers are optimistic and see a bright future in regards to future business, income and jobs.

As the board noted:

‘”Consumer Confidence increased in October, following a modest gain in September, and remains at levels last seen in the fall of 2000 (September 2000, 142.5),” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers” assessment of present-day conditions remains quite positive, primarily due to strong employment growth. The Expectations Index posted another gain in October, suggesting that consumers do not foresee the economy losing steam anytime soon. Rather, they expect the strong pace of growth to carry over into early 2019.

US consumers are happy with how the economy is going. The truth is that unemployment figures in the US are looking great.

The US added 250,000 jobs in October, driving the unemployment figure to a low 3.7%.

The US may be looking like it is on a winning streak, but US consumers are basing future expectation on past performance. That is, they are expecting that the present will continue to repeat itself in the future.

In other words, they are expecting things to stay the same.

The US market has been on a bull run for years…so it should continue to go up.

Job figures have been increasing…so there will be more jobs available in the future.

The problem with this thinking is that it is flawed. Things never remain the same, they change constantly…and they can change at any time.

Let me give you an example. The chart below shows the US unemployment rate since 1960.

US unemployment rate

Source: Trading Economics

[Click to open new window]

As you can see above, US unemployment was at a low level back in 2007…and soon after, a recession followed which drove unemployment up to 10%.

In fact, most of the times when unemployment has fallen to low levels a recession has followed.

1969…1980…1990…2000…2007…

 

Fake economic growth

The problem with all this growth we’ve seen recently is that it isn’t real.

It has been mostly fuelled by debt.

We suffered a debt crisis back in 2008. While things may be looking good on the surface today, the debt problem has been getting worse.

US consumer debt has been rising since. Credit cards…student loans…cars…these are all way higher than in 2008.

And the government has also been increasing their debt.

Just in 2018, the US budget deficit increased by a whopping US$779 billion…or 17%.

Meanwhile, the US Federal Reserve is also increasing interest rates. The central bank is looking to reverse eight years of monetary stimulus by increasing rates and decreasing their balance sheet.

The Fed has increased the rate three times this year, and is looking at another increase by December.

All this debt is unsustainable…and higher rates will make it much more expensive.

How much longer can we finance this fake growth with debt? My guess is not much longer.

It is in moments like this, when people are optimistic, that you should be weary.

We may be seeing growth, but we are also building a mountain of debt to create that growth.

We could suffer a black swan event ­— an unpredictable event that changes everything — at any moment.

US consumers may be expecting the future to continue in a linear way from the past. They are trying to predict the future from our current present.

That is, they think that credit will remain readily available…that interest rates will remain low.

But the truth is that the world is an uncertain place, and these are dangerous assumptions.

It is impossible to predict the future.

That’s why you shouldn’t get complacent.

Expect things to change.

Assume that anything can happen…and be prepared for it.

Best,

Selva Freigedo

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