Will "Main Street Spoil the Recovery?"

From CNBC:

"Main Street has just entered the act. The peak of the pain is not visible yet," said Asha Bangalore, an economist with Northern Trust in Chicago.

The consumer strains are well-documented. Aside from the credit contraction, gasoline and grocery prices are on the rise, the housing market remains distressed, and consumer confidence is at recessionary levels. Tax rebate checks are in the mail, but that alone cannot compensate for the credit clamp-down and inflation pressure.

"Given that households are strapped financially, it is far-fetched even with the stimulus checks to expect a sharp increase in consumer spending," Bangalore said. "You have seen auto sales numbers for April, they posted a sharp drop."

.....

To say that Wall Street is expecting a second-half recovery would be an understatement. According to Thomson Reuters research, analysts are expecting fourth-quarter earnings growth of 62 percent for the S&P 500. Granted, that is a comparison with a disastrous fourth quarter of 2007, when earnings were down some 25 percent. In the current quarter, S&P 500 earnings are expected to be down 6 percent.

Not only is the market anticipating a swift recovery, but the earnings forecasts suggest that they think it will be lasting. For next year, analysts think earnings will be up 18 percent, twice the growth they are predicting for 2008.

They see particularly strong growth for consumer discretionary companies, beginning with the next quarter. Earnings for that sector are expected to jump by 41 percent in the fourth quarter, and 24 percent next year.

The article focuses on the tightening credit situation in the market (which I dealt with here.) But I want to focus on a basic problem of the market rallying in the current economic environment.

Here's the fundamental question: will the economy rebound in the 2H 2008, proving the market right?" I have doubts for the following reasons.

First, let's start with the following charts:

Job growth is still dropping from a year over year perspective, and

The unemployment rate is still increasing

Real disposable income is decreasing which is

Lowering sentiment and

Confidence

Year over year spending did increase in the latest report. However, note the following regarding that upturn.

-- in the latest GDP report, both durable and nondurable goods purchases decreased. The reason for the increase was an unseasonably high increase in service purchases.

-- One month does not a trend make especially in light of the preceding trend.

Also remember that inflation is high right now:

High inflation crimps consumer spending.

This is not to say that people won't increase their spending. But in light of declining job prospects, record oil and food prices and a slowing economy, it just doesn't seem like the consumer spending will increase in a big way anytime soon.

Then there is housing which started this mess. The inventory/demand situation is still horribly out-of-whack. From Calculated Risk, here is a chart of total existing homes on the market:

So -- we're at 4 million. And that number will increase because foreclosures are increasing in a big way -- they more than doubled in the first quarter. And it's not like we need all those homes -- not by a long shot. Home vacancies are now at a record.

And who is going to buy these homes when credit conditions are tightening and consumers already have a record amount of debt?

So, according to the facts we have the following situation:

-- job growth is slowing

-- as is real income, which is

-- lowering consumer confidence and sentiment. In addition,

-- inflation is high, lowering spending.

-- Housing inventory is still high, and

-- rising foreclosures will increase that number.

-- Record levels of household debt and tightening lending standard will prevent a housing rebound.

Simply put, this is not a pretty picture for the second half of the year.

Comments

[FreedomCorpse]

Since when does Wall Street or federal economic policy care about Main Street? The recovery will begin when the DJI matches 1:1 with the price of gold like 1980, however that plays out.

[swift goat pet for truth]

This is basically my question.

The middle class has used up most of its credit. There is no more real estate to borrow from.
After a decade of squeezing efficiency out of the system businesses do not have much more to squeeze.
The workers have had no real gains in pay. Energy and food costs are going. Discretionary income is dropping.

How do businesses grow their sales? Where is the money coming from?
How can the talking heads say the economy will recover anytime soon?

[dukeitout]

You say "How do businesses grow their sales? Where is the money coming from?" One valid answer is the profit coming from business outside the US of A. Invest in American companies that do a lot of business overseas or Canada or the far east, middle east, England, Ireland, etc. They get paid there in Euros or the currency of the particular countries which generally getting stronger in relation to our dollar. The rest of the world is growing gradually and good ole American companies will get more than their share of that business.

[djthedj]

Um, the fed is just printing it up and handing it out. $600 each to us, hundreds of billions to investment banks. McCain should just announce that he is going to give everyone $10,000, hell why stop there, how about $50,000, $100,000? Why not, it's just play money from here on out.

[Rockyman]

Not a "pretty picture for the second half of this year" as well as many years to come. Until we can get our trade deficits drastically reduced and learn to live with some discipline, we are in for belt-tightening whether we like it or not!

[cynicalgirl]

Also, inflation will continue to rise and dollar will continue to fall as a result of the Fed's lowering interest rates. And there are two more years of ARM resets. It's not going to be a good couple of years.

[MourningDude]

You sound like all the perma-bears from October 2002...

I'll never understand the "buy high, sell low" bandwagon mentality.

[RumiSouth]

Maybe you could try living like the other 75% of America that doesn't own stock? We're out here in this bleak picture he's drawing...in fact, we ARE that bleak picture.

[NewRiver]

75% of America that doesn't own stock? Surely you jest. I'd be willing to bet at least 50% of American adults own stock, whether it's through a brokerage account, a mutual fund they own, or their 401(k) plan.

[CharlesMac]

HuffPost's Pick

I don't know if your numbers or correct but you draw a distinctive analogy.

There is a asset class and there is a paycheck class.

My portfolio reached a retooling point in its multiyear cycle this Fall. This means i had to start paying attention, to some degree, to the market. Unfortunately that is inextricably entwined with the pornography of pundits and financial demi-gods.

Sickening to watch, to the asset class, things like mass layoffs are cheered. Better profit margins for the company. Better portfolio. Most statistical numbers like inflation, unemployment, consumer price index etc are actually geared to provide the asset class economic trends which can be used to position their assets. Screw the people being crushed by the numbers.

Meanwhile, I fight every month to keep my monthly budget the same size as my month. The month has been winning over the past two years. We cut out more and more as costs go up and up.

Ability, effort, and education will always be the economic measure of people's value. And that's fair. But your opportunities erode very quickly if you can't build assets.

And everything I have had to witness in the past ten years, has strengthened the asset class and punished the paycheck class.

A paycheck person can no longer save their money, put it in the banks, CDs, T-bills, savings plans, and keep up. They HAVE to go to markets where risk and robbers abound.

The asset class has won.

[olephart]

Dude, there's money to be made in every market. The recognition of reality is an asset, not a liability. If the fundamentals point down rather than up go short or go cash. There's money to be made in a sucker's rally if you've got the nerves for it. I'm long in some things, short in others and have plenty of cash on the sidelines. We're above the recent trading range and may break upward, if so I'll ride it up and hope I can read the read leaves at the appropriate time and cash in on some profits. If it falls back into the trading range I'll hold tight and let the shorts cushion the fall. If it breaks lower I'll bail.

[ChibiOne]

I just wish it would all hurry up and freakin collapse -- taking the fools who started this mess with it -- so we can begin picking up the pieces and learning from the mistakes. Nothing gets an addict to get his crap together like hitting rock bottom.

Unfortunately, the fools who started it all have done their best to insulate themselves from the repercussions. It is laughable when I hear Bernanke, for example, saying that they didn't bail out Bear Stearns, that they suffered "significant losses." I'll bet, for the vast majority of them, that doesn't include losing their homes. Watching their families run the risk of starving. Having to explain to their children why there won't be birthday or Christmas presents this year. No, the 'significant losses' their talking about might mean they have to wait another year to get that fifth Ferrari they've been wanting. Maybe have to sell one of the houses they use least.

[dshwa]

The problem with that thought is 1) the fools won't be taken with it, becuase they have the assets and resources to get out. and 2) the government will insulate the very top as they did with Bear Sterns.

[Chavez08]

A hard market system crash would be the best thing for this country.

This "Two Economies" bullshit has to come to an end.

[NewRiver]

Spoken like a true Edwards "Two Americas" Kool-Aid swilling Democrat. Congratulations for buying the lie.

[swift goat pet for truth]

So, there are not two Americas and all the graphs in the article are lies.

And Chavez08 is the one drinking the Kool-Aid.

LOL.