The Commerce Department reported that U.S. fourth-quarter GDP contracted by 0.1%, way below forecasts of a 1.0% increase. This is a sharp and fast deterioration from the third-quarter which saw GDP expand by 3.1% and marks the first contraction since the second-quarter of 2009.Of course economists brush of the negative figures and stamp them as meaningless, but if the figures would have been positive they would have labeled them as very significant.
The contraction came despite an increase in consumer spending which rose 2.2% which shows that consumers started to borrow again and continue to support the fragile economy with money they do not have. Consumers load up on debt and a consumer debt crisis in the U.S. is imminent. Incomes have stagnated and prices increased which means consumers have less disposable income available. The increase in consumer spending signals a worrisome increase in household debt.
Defense spending saw the biggest cut in almost half a century and companies reduced inventory production in anticipation of weak demand in the future. Exports saw the biggest drop in four years and suggest weakness in manufacturing ahead. The U.S. Dollar should be under pressure over the next few weeks and the EURUSD may approach the 1.3800 level next month.
Adding to consumer problems is Obama’s increase in social security tax which will further slash disposable income and the U.S. may enter a technical recession during the first-quarter. Most Americans never exited the Great Recession and the way the government calculates figures is not in line with real economic developments. Consumer spending should contract starting this quarter and remain weak throughout the year with a small increase in inflation which will further pressure American households.
Due to Obama’s tax increase consumers will have between $1,000 and $4,500 less in disposable income during 2013 which will shave roughly $40 Billion of economic activity alone. The middle-class will carry most of the burden due to Obama’s tax policies and the economic cost will be malicious for the government through 2020.
Spain reported its fourth-quarter GDP came in worse than expect at a contraction of 0.7% only days after the country reported an unemployment rate of above 55% in adults under the age of 25. This was the sixth consecutive GDP contraction and the most recent indicator that austerity measures have put the country deeper into the recession than anticipated. There are rumors of a Spanish exit from the Eurozone which currently join the Greek exit rumors and hint at a slow collapse of the Eurozone which should force positive change to the monetary union.
A complete collapse of the current Eurozone is required before policy makers realize they system was destined for failure and that changes should have been made decades ago. The current approach of the Eurozone in order to handle the issues are counter-productive and cause further monetary bleeding which tax payers have to endure while the overall quality of life is on the brink of collapse.
The UK initiated the latest round of economic contraction when it reported last week that GDP shrank by 0.3% and the country currently flirts with a triple dip recession. The trend is evident that the global economy is not nearly as healthy as economists have predicted which puts recent equity market performance out of line with reality. Market participants should anticipate a sharp contraction in most equity markets in excess of 30% in a bear market which will fully unfold towards the end of 2013 and last through 2014 and possibly beyond due to counter-productive measures taken by governments and central banks.