Alot has happened in the last two weeks, most of which continues down the wrong path for the U.S. economy and leads us to delve further into familiar topics from the last two letters.
A first estimate of GDP for Q2 was rather disheartening, coming in at 1.3 percent. This was below estimates and down from Q1. If you recall, we pointed out anytime GDP has fallen below 2 percent year over year growth that an economic recession follows. Below is the referenced chart, periods shaded in orange represent periods of recession.
The economy was creeping close to this figure in Q1, posting a year-over year growth rate of 2.4 percent. The initially reading for Q2 GDP places the economy at 1.6 percent year-over year growth, below the key 2 percent threshold. So unless we see an aggressive upward revision to the second and third estimates of GDP (which is unlikely), I believe the outlook for a double-dip recession pretty much speaks for itself.
We some lower level evidence of a weakening economic picture when analyzing consumer credit. As mentioned a few weeks back, credit card use jumped in May, a trend that continued in June. The Federal Reserve reported Friday that consumers increased borrowing by $15.5 billion in June.
Furthermore, credit card debt surged $5.2 billion for the month, the largest monthly rise since March 2008. This is not an indication consumers are more willing to finance discretionary purchases because they feel secure in their income producing ability; unemployment is still in excess of 9 percent and only 114,000 new jobs were created in July.
Rather, Americans are using their credit cards more and more to finance daily living expenses as a bridge to their next paycheck. As mention in earlier letters, this is not a conducive scenario for strengthening consumer spending, a key driver for the serviced based economy, that is our nation, to recover.
Lastly, I cannot conclude this letter without mentioning Standard & Poor’s downgrade of the U.S. credit rating to AA+ from AAA. Am I surprised? No, not based on fundamentals I am not. What I worry about is what it means for the credit of sovereign nations and the possible domino effect that could be coming in downgrades.
If the U.S. was a candidate for a ratings downgrade, where does this leave a country like France for example, who currently holds a AAA rating. The fiscal health of France is no better than that of the U.S., so is there any reason not to expect a downgrade in their near future?
The coming week will be very interesting for not only the equity market reaction and action in gold price, but for the ripple effect that may be seen in credit ratings.
Your swimming through the debt current analyst,
Mitch Jaworski