Pessimists believe that the following economic indicators signal an economic recession and bear market in stocks are just around the corner. They’re wrong.
Retail store closings & mall closings
It seems as though retailers are shuttering stores every week now. Due to the decline of large stores such as Sears, many malls either face reduced foot traffic or are dying off all together.
The bearish argument is twofold:
- The decline in physical retailers “proves” that customers have less discretionary income to spend. Since the economy relies on consumption, this does not bode well for the current economic expansion.
- Retailers hire a lot of workers, and the closing of their stores means a lot of workers will be laid off. Unemployment will rise, particularly among the poor and young workers.
Both of these arguments are wrong.
The decline in physical retailers only means that online competition like Amazon are eating their lunch. Companies like Amazon are experiencing strong sales growth primarily because shoppers are moving online. Why buy a TV at Best Buy for $700 when you can get the same TV on Amazon for $600? Total retail sales are still experiencing decent growth in the U.S.
Yes, it’s true that the shift from physical stores to retail means that less workers will be hired. But this is not bad for the economy in the medium-long term. There are parallels in history. The U.S. economy was not adversely affected when manufacturing left for China. The U.S. economy simply restructured itself and workers moved into other rising industries.
Q1 GDP growth will be weak
Projected GDP growth in Q1 2017 ranges from 0.5-1%. This is lower than the current GDP growth rate, and if this pace continues it will be the worst year of GDP growth since 2009. This has got some bears predicting a “recession”.
However, the pessimists fail to remember that Q1 GDP growth tends to be weak every year. It’s purely a seasonal thing and possibly has to do with weather impacts on northern states. E.g. over the past few years Employment growth in January and February has been weak.
The overall economy is still growing nicely, and GDP is not a good economic indicator. It is very noisy and often gets revised significantly.
Here’s why you should ignore the weak Q1 GDP report.
Declining auto sales
Auto sales have been declining since December 2016 and dealer inventories right now are comparable to levels during 2009. Bearish investors believe that auto sales are a leading indicator for the entire U.S. economy. “If big ticket items like auto sales are struggling, then the U.S. economy will enter into a recession as well”.
This is wrong. Yes, it’s true that U.S. auto sales started to fall in 2004, 3 years before a recession hit in late-2007. But the key word here is 3 years. Auto sales is not a good timing indicator. In addition, many historical recessions were not led by declining auto sales. Bearish investors need to expand their economic data and not cherry pick the data.
Subprime auto loan losses
Subprime auto loan losses have soared to the highest level since 2009. Anything that has to do with “subprime losses” tends to remind investors of 2007-2009. Investors should not be afraid this ime.
The mortgage loan market is many times larger than the auto loan market. Subprime auto loans is a relatively tiny market. And contrary to popular belief, subprime mortgage losses did not cause the 2007-2009 recession and bear market. Subprime is a relatively small part of the mortgage market.
The 2007-2009 recession and bear market was caused by the complete collapse in housing. Subprime losses were only a small part of that picture.