Economic Plateau

At the beginning of 2012, we wrote that the economy was going to do very well in the near term. The 18 months that followed proved our predictions correct, and equity prices reflected that as the Dow Jones Industrial Average, NASDAQ Composite Index and S&P 500 all saw new highs during that period. As time has passed the economic environment in which we live and work has changed, and our outlook on the economy has changed as well.

We want our readers to know that we are not “doom and gloom” on the US economy in the long-term. We still believe that manufacturing and industry are going to continue to come back to the US over the next several years, but we also need to evaluate and the economy in the short-term and the mid-term.

After reading economic reports and hearing anecdotal evidence from our contacts all over the country, we believe that the economy has reached a plateau. That is not to say that the economy is going to decline, but rather will remain stagnant. Many of the economic reports and numbers released over the last several weeks reinforce that belief.

Consumer Spending in July was up slightly, but lower than analyst expectations, with autos, electronics and home furnishings weighing down the figures according to Bloomberg. At the same time, businesses have kept inventories flat, while Gallup’s US Consumer Spending Measure failed to show any growth over the last month. The Consumer Credit report has also reflected that consumers are hesitant to go out and purchase more goods than they have been.

All of those figures have also taken a toll on employment. Gallup’s US Job Creation Index reported more layoffs and less hiring. While Jobless Claims are trending lower, they are still at coming in at over 330,000 new claims per month, which is not a strong sign of economic recovery. Overall, Consumer Comfort has risen to a post-recovery high, but is still half of what it was in 2007 and 2008.

Recently the Wall Street Journal ran an article detailing lower-than-expected back to school sales, a figure that many retailers rely on during the summer to boost their bottom lines. Amongst all of these figures and reports, one stands out to us, and that is Capacity Utilization.

Capacity Utilization is measured as a percentage and can be thought of as the percentage of resources that are being used to meet the demand that consumers have for goods. Right now that figure is at almost 78%, a number which was last seen in 2003. It is important to note that utilization fell to almost 65% during the recession, but recovered quite well. However, as the title of this article mentions, the number has begun to level off.

It is our belief that without deploying new capital and hiring new workers, the domestic economy is pumping out as many new products as the market can afford and consume at this time. Without corporations deploying cash and hiring more people, we see economic growth slowing to a standstill for the rest of the year, and maybe longer.

Ben Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com) and licensed with FINRA (www.Finra.org) through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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