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Aug 10

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S&P Issues a Gloomy New Economic Report

On August 3, with practically all second quarter earnings reports and forecasts completed, S&P provided a dismal view of the state of the American economy. The report was a dramatic change from prior, more positive reports. According to this week’s report:

Months of disappointing U.S. [economic data detailed] … forced [us] to consider a much more somber view of the economy and financial markets relative to the opinion we have held for the past few years. In light of this and other recent weaker-than-expected economic data, including retail sales, durable goods (ex-transportation), and second-quarter GDP growth, we are now more cautious in our outlook for the U.S. equity market over the next few quarters. As we see it, the economy has lost significant forward momentum, which is worrisome since the economy may be more vulnerable than we thought to the multiple structural challenges that have impeded healthy GDP growth since the start of this recovery.” (Citations omitted)…

We are primarily concerned with two issues: First, U.S. disposable income growth has remained anemic since the incubation of the financial crisis. Second, U.S. loan and lease bank credit growth over the duration of the current subpar economic recovery remains weak. U.S. inflation-adjusted per capita disposable income has not grown at all since the start of 2007. …”

Corporate earnings are also stalled. According to S&P:

Now that earnings season is all but over, many investors have turned their attention to the remaining half of the year. Once expected to be the second best quarter of the year, the third quarter is now expecting the lowest growth rate, of negative 1.25%. That number has come down from estimates of 7.41% on Jan. 3, 5.55% on April 2, and 3.25% on July 2. Analysts are also slashing estimates for the fourth quarter.”

The above quotes describe a “structural challenges”. S&P elaborates on this as follows:

As real disposable income is the engine of U.S. consumption and prosperity, very little income growth will result in subpar GDP growth. The historically weak rate of bank loan and lease credit extension is partially due to weak consumer demand for credit, but also reflects the heightened post-crisis regulatory environment, in our opinion. Economic policymakers must now find a way out of the liquidity trap that these structural challenges have created. Due to sporadic and inconsistent U.S. employment growth since the start of this recovery, nonexistent disposable income growth is generating weak consumer demand for credit, giving lenders yet another reason to remain cautious about lending (which could fuel growth) amid heightened post-crisis regulations. Strong U.S. nonfarm payroll growth in the first quarter of 2012 led us to believe that accommodative monetary policy was finally stimulating growth and accelerating economic momentum, but second- and early third-quarter developments are suggesting otherwise.” (Citations omitted)

Like most economic-laden reports, one has to wade through the difficult language to understand the plain meaning. Nevertheless, the meaning is there. Some suggest that recent past U.S. policy has worked. The highly-regarded S&P research unit disagrees with any such claims of past strategy and success.

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

Permanent link to this article: http://betweenthenumbers.net/2012/08/sp-issues-a-gloomy-new-economic-report/

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