Economy: A Relatively Cautious Stance Is Warranted – Here’s Why

Does lousy growth + lousy construction spending = trouble for the U.S. economy? That’s what you have to wonder in light of the latest figures coming out of Washington.

The comments above and below are excerpts from an article by Mike Larson (moneyandmarkets.com) which has been edited ([ ]) and abridged (…) to provide a faster and easier read.

We learned on Friday that U.S. GDP grew just 1.2% in the second quarter. That was less than half the average forecast of Wall Street “experts.” Not only that, but Q1 GDP growth was revised down to 0.8% from 1.1%.

Private fixed investment plunged at a 3.2% rate, the worst drop in seven years. Companies slashed inventories the most since 2011. Residential investment fell 6.1%, the most since 2010, while government spending dropped 0.9%, the most since 2014.

All told, our economy has grown at an average annual rate of only 2.1% since the Great Recession. That’s the worst for ANY U.S. “expansion” in the post-World War II era.

Things would have been even worse if it weren’t for relatively healthy activity in the construction sector. The industry was a key source of strength from 2009 through 2015, thanks to low interest rates and an explosion in easy lending for real estate acquisition, construction, and development but we learned today that construction spending tanked 0.6% in June. That was much worse than the 0.6% increase that economists expected. It also followed a 0.1% decline in May and a 2.9% plunge in April.

We haven’t seen spending fall three months in a row since the period from November 2012 to January 2013. At the same time, construction employment has dropped or stagnated for three straight months. That hasn’t happened in four years. Throw in the fact the ISM manufacturing index dipped to 52.6 in July from 53.2 in June, and you can see why I continue to maintain we’re in a pre-recessionary environment.

It remains to be seen if hopes for more central bank funny money or fiscal stimulus can win out in the battle against lousy data but stocks have generally been treading water since the big move in July, while economically sensitive commodities like crude oil are tumbling again, so I think a relatively cautious stance is warranted.

Disclosure: The above article has been edited ([ ]) and abridged (…) by the editorial team at munKNEE.com (Your Key to Making Money!) to provide a fast and easy read.

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