Major leading indicator in free fall!

In my July 14 Money and Markets column, I explained how the Economic Cycle Research Institute’s (ECRI) Weekly Leading Index confirmed my bearish forecast.

Back then, the index’s growth rate was minus 8.3 percent. And as you can see in the chart below, it is continuing to freefall — tumbling to minus 10.3 percent for the week ending July 30 …

Since the year-over-year percentage change sliced through the zero line at the end of May, it has quickly fallen to levels signaling a very high risk of recession. What’s more, it has never fallen as low as its current reading without the economy already in — or on its way to — a recession.

In addition to the ECRI weekly indicator’s very clear message, I see six more reasons that back up my argument for a double-dip recession hitting the U.S.:

First, the economic rebound since March 2009 was bought with unprecedented fiscal and monetary stimulus. There has not been a real, market-generated recovery.

Second, despite the huge sums of taxpayer money and serial bailouts, the rebound is the weakest on record.

Third, at least 80 percent of this huge stimulus program has been used up. There isn’t much left to keep the economic engines running.

Fourth, aside from government debt, the wheels of credit creation are still sputtering. And that’s a problem, since former recoveries have always been driven by credit growth.

Last week’s employment report spells bad news for retailers.

Fifth, the labor market is still in dire straits — and so is consumer spending. Friday’s disappointing payroll report is a very strong hint that the labor market is again deteriorating.

Following the ECRI data, this is not surprising. Historically, there has been a strong correlation between the ECRI weekly index and payroll numbers. Furthermore, I expect much weaker employment reports in the weeks and months to come.

Sixth, the housing mess has not been cleaned up yet. I expect another huge wave of mortgage debt defaults, leading to another round of falling home prices and problems for the banking sector.

All in all, the big economic picture is pretty grim. Indeed, the economy is at a crossroads here. Unfortunately, though, it seems to be heading down the recession path again.

And since every recession in history has been accompanied by a severe stock bear market, my suggestion is clear: Make sure that your portfolio is protected from this wealth-destroying scenario.

Best wishes,

Claus