Federal spending is replacing private, productive spending, and government debt is rising. This reallocation of resources by government ruins national economies.
The recent decline in stock prices has occurred despite what appears to be good news on the economy and inflation. Although the market decline is fairly modest, technical market indicators have signaled their first cautionary sign since April.
The Week That Was
The July inflation reports were mixed. The CPI was all good news, with the total CPI and core CPI up 0.2 percent for the month.
The core CPI is the most important measure to watch. It was up 4.7 percent for the year. However, it has declined steadily, with the six-month, three-month, and one-month rates at 4.1 percent, 3.1 percent, and 1.9 percent, respectively.
Friday’s producer price reports were not as encouraging. Although the yearly and six-month
rates were in the 2 percent vicinity, the annualized rate for core producer inflation in July was 4 percent.
As for the total CPI, the news so far has all been good. The one-year rate is at 3.3 percent, and the latest month was at 2.0 percent. However, the rapid decline in overall inflation has benefited from a 20 percent decline in oil prices over the past year. That will end in August, with oil prices up 19 percent since July 4th.
Through the first week in August there has been no significant increase in either initial unemployment claims or payments for unemployment insurance.
Things to Come
Tomorrow’s July retail sales report will be interesting. Prior retail sales show a significant
slowing, with an increase of only 1 percent over the past year.
These data are running well below other measures of spending, so a sharp upturn would bring them into line with other data. In any event, retail sales data tend to be erratic and unreliable. It’s best to ignore them.
Unlike retail sales, Tomorrow’s report on August housing from Homebuilders is a reliable early measure of the new home market. Due to a lack of supply, the market for new home construction remains moderately active despite 7 percent mortgage rates. Look for the Homebuilders’ Index to remain in the mid-50s.
Despite a slight increase in recent months, housing starts and permits are down 20 percent from the spring of 2022. Wednesday’s report for July is likely to show little, if any, improvement.
Also on Wednesday, the Fed reports on manufacturing activity. Surveys indicate manufacturing remains flat to down.
Market Forces
Stocks moved lower for the second consecutive week. The S&P500 is down 3 percent from its recent peak at the end of July.
Although the decline is modest compared to the runup since last October, technical indicators are providing a tentative negative signal for the first time since April. Both the S&P500 and Nasdaq indexes have had their 10-day averages go below their 21-day averages. The 21-day average has often been a key level of support.
The recent market weakness in stocks comes amid an apparent improvement in economic conditions. The Atlanta Fed uses current data to estimate real growth at a very strong 4 percent rate this quarter. At the same time, July core inflation continues to be moving rapidly toward the Fed’s target rate.
What’s going on? For one thing, the economy is in trouble in spite of the good news. The irresponsible blowout of federal spending combined with a sharp decline in tax revenues has led to a surge in federal debt. Interest payments will continue to soar as a percent of all federal spending, creating serious problems.
An increasing amount of federal spending is replacing private, productive spending. This reallocation of resources by government in the Soviet Union and Russia ruined its economy.
We continue to expect the delayed impact of monetary restraint to produce an economic downturn late this year and into next year. We also continue to expect it to take longer for inflation to get down to the Fed’s target.
If our analysis is correct, interest rates will remain close to current levels, and stocks will remain under pressure.
Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 15 percent
Monetary Policy: restrictive
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