Submitted by Michael Pento – Pento Portfolio Strategies
Wall Street carnival barkers are relishing in the fantasy that the economy has finally achieved escape velocity. Therefore, they accept with alacrity that this is the primary reason why interest rates have started to rise. However, the fact still remains for the first half of 2015 GDP growth will probably be less than 1%.
GDP contracted by 0.7% in the first quarter of 2015. The Atlanta Fed, whose GDP Now calculation has been on the money, now sees second quarter growth at 1.9%. Therefore, it is prudent to conclude the most optimistic case for growth in the first half of the year will be about 1%. Of course, the perpetually upbeat economists on Wall Street are always convinced the economy will skyrocket in the second half of each year. But still, if the Atlanta Fed is correct—and it looks like it will be spot on given the anemic data already released for April and May—annualized GDP for the first two quarters of 2015 will be running at a pace that is less than half of the 2.2% growth averaged since 2010.
Perpetual optimists will highlight the recent positive data in housing as evidence of a robust recovery. But most of the upbeat numbers in housing are a result of front running the inevitable mortgage rate increases, as people rush to lock into low rates while they still can. And even with this, housing data has been mixed at best. U.S. housing starts in May fell 11.1%, to an annual rate of 1.04 million units from a revised 1.17 million units in April. This rate of new home construction is far below the 1.5 million rate seen in the year 2000, and light years away from the 2.2 million rate at the height of the housing bubble.
And we also have some encouraging data in retail sales, courtesy of the booming auto market. But sales in cars have been driven by the resurgence of the infamous liar loans, loose lending standards and virtually free money that led to the collapse in Mortgage Backed Securities in 2007.
Yet, despite booming car sales and slightly better new home construction rates, the nation’s manufacturing base remains literally in the basement. For example, the Empire State’s business conditions index unexpectedly dropped to -1.98 in June and Industrial Production decreased 0.2 percent in May after falling 0.5 percent in April. May is the fourth negative reading in the last six months on I.P., with the other two readings being flat. Continue reading