The Coming Recession? Not So Fast

by Jon Markman | September 2, 2011 11:37 am

The data on home sales earlier this week was spun as market-friendly, yet that’s only the case if you look at it backwards and squint. You see, U.S. pending home sales fell 1.4% in July, worse than expected. But — are you ready — it was not as bad as feared, so it was taken as a positive. See how that works?

It was the first drop in a few months, which is bad, but optimists pointed out that sales were 14.4% above levels of a year ago.

The hope is that it was an aberration, but the problem with that point of view is that mortgage applications lately are already headed in the wrong direction, declining for three straight months. And the early looks at August mortgage applications cannot fill us with hope.

The bottom line is that this number typically is a forerunner of the August existing home sales release, and it suggests a rather negative report is likely.

We also recently had a report on U.S. personal spending. It jumped 0.8% in July, which was the largest monthly gain in two years, and wiped off June’s 0.1% decline. The advance in spending was helped by a 0.3% increase in personal incomes in the month.

The rise broke a string of three straight monthly declines and gave a good start to the third quarter. Annualized out, it comes to a 2% clip, which is not too bad.

Here is what it all means: The July data on spending significantly changes the outlook for third-quarter GDP growth. It suggests that annualized growth may come in closer to 2.5%, according to Capital Economics analysts, which is a far cry from the 1.5% or less that has been forecast by economists that were tripping each other to cut expectation a few weeks ago. The spending on durables, mostly cars and trucks, was the best since December 2009.

This means that even if real spending (i.e. spending growth minus inflation) is only 0.2% month over month in August and September, then annualized consumption would still come in at 2.5% in the third quarter, up from 0.4% in the second quarter. It’s a shame that much of the spending growth appears to have come out of savings. But if you think about it a second, any shortfall in spending in August due to the market wipeout would likely be reversed by spending to rebuild after Hurricane Irene.

The key point, and I cannot emphasize this enough, is that 2.5% annualized growth is most definitely not recession territory. So if this pace keeps up, stock prices at current levels are probably too low and have plenty of room, valuation-wise, to advance in the next few months.

Trying to be optimistic, it’s possible that we may look back at the big decline in August at the end of the year as a “recession scare” exacerbated by worries over European debt — and not the start of a larger problem.

For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage,[1] or his long-term investment service, Strategic Advantage[2].

  1. Trader’s Advantage,:
  2. Strategic Advantage:

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