Four glaring signals of US distress

The US sharemarket managed to hit a three-month high overnight, eking out small gains, as investors continued to turn a blind eye to the four glaring danger signs for the US economy: more bad news out of Europe and China, slowing US exports, and the latest spike in food prices which are delivering a further blow to US consumers.

The flow of bad news out of Europe has temporarily abated, as European officials have headed off on their summer break. But most believe it will likely flare up again in coming weeks, forcing Spain to formally request the eurozone's bailout fund to step in and buy its bonds. And that's without mentioning the storm that will be unleashed when the 'troika' files its latest report on Greece's failure to meet its bailout targets, and Berlin has to decide whether it will finally put an end to the flow of aid money into Athens, which would trigger a Greek default.

Meanwhile, the news out of China is far from reassuring. The deepening European recession has dented demand for Chinese exports, at a time when Beijing's policies to curb speculation have created major problems for the country's property market. Figures released yesterday showing that industrial output rose by only 9.2 per cent in July compared with a year earlier, down from 9.5 per cent in June, and the lowest level since May 2009. Even more alarming was that electricity generation only rose by 2.1 per cent compared to a year earlier, pointing to a sharp slowdown in energy-intensive heavy industries, such as steelmaking.

As Gluskin Sheff's David Rosenberg notes, the European malaise has not only infected Asia, it's also clearly showing up in the United States. He points out that the ISM index of export orders is already dropping sharply, falling from 59 in April to 46.5 in July and, given the strong correlation between the ISM index and total US exports, this will soon show up in slumping US exports.

"I think that there may be a time, before too long, when we will walk into the office to find that the US prints a negative GDP reading on the back of a negative export trade shock that does not appear to be in any forecast – let alone consensus”, he warns.

But Europe isn't the only cause for US worry. Rosenberg argues the economy is likely to be hit by a further unpleasant shock, when US producers set to work to reduce their bloated inventory levels. "How do I know that? Because the share of ISM industries polled in July reported that customer inventories were excessively high soared to 33 per cent in July from 11 per cent a year ago… the highest ever for any July in the historical database.”

Meanwhile, debt-laden US consumers are suffering a fresh income squeeze as they're forced to pay more for food and groceries. The worst US drought in half a century has pushed up corn, soybean and wheat prices by between 30 and 50 per cent since June, and this is already showing up in higher food prices. Last week, the giant packaged food company, Kraft Food, said that it had been relatively successful in increasing its prices to reflect rising commodity prices.

As Rosenberg points out, "the food price situation is another major wild card, especially since whatever relief we enjoyed from lower gasoline prices is now behind us. At a 14 per cent share of the consumer spending pie, only shelter is more important than food. And when you go back to the last food cost surge, in the first quarter of 2011 when the grocery bill soared at a punishing 10 per cent annual rate, real GDP growth slowed to a 0.0 per cent annual rate that quarter.”

Eventually, investors will be forced to heed the growing recessionary forces gripping the US economy.