Where the heck is this economy headed? That’s a question Wall Street (and I) have been wrestling with.
Fortunately, we got a ton of fresh data this week to shed some light on the answer. The early week results were somewhat of a mixed bag. Home prices rose more than expected, as did April personal spending. The national ISM manufacturing index slightly topped forecasts … but the regional indices for Dallas and Chicago stunk up the joint.
Then we got a look at the ADP jobs report yesterday. It showed the U.S. economy adding 173,000 jobs in May after adding a (slightly) upwardly revised 166,000 in April. That’s a noticeable downshift from the kinds of readings we saw in late 2015 and early 2016 … and a big decline from the 200,000-300,000 readings we consistently saw in 2014, as you can see in this chart:
The weakness is most evident in manufacturing, which lost 3,000 jobs in May. But construction employment growth has also been trending lower, falling to a six-month low of 13,000.
Speaking of construction, we learned Wednesday that spending in that industry plunged 1.8% in April, compared with forecasts for a 0.5% increase. That was the worst decline going all the way back to January 2011.
Nonresidential construction dropped 1.5%, while government construction fell 2.8%. But one stat really stood out, considering the massive apartment glut and REIT frenzy I’ve been warning about: Multifamily construction plunged 3.1%. Could this be the start of a major comeuppance in that corner of the commercial real estate business? Absolutely!
As for autos, sales dropped 6% year-over-year in May. That was the biggest monthly plunge in almost six years. Individual automakers like General Motors (GM) and Ford Motor (F) missed estimates by a huge margin. Retail buying cooled, forcing companies to resort to lower-margin rental-fleet sales (again). And the decline occurred despite incentives jumping 11% to an average of $3,000 per vehicle, according to Autodata.
Look, I haven’t been shy about the auto industry: It’s a disaster in the making. We have too much auto inventory, too much lending to lousy borrowers, and too many borrowers upside-down on existing loans. Automakers are going to be forced to slash production in the coming months, and that’s going to take even more wind out of the economy’s sails.
Bottom line: Banking on a big resurgence in the U.S. economy doesn’t look like a wise move to me. The data suggests we’re losing momentum, not gaining it. And if I’m right about where we are in the credit and economic cycle, conditions will be getting worse rather than better as 2016 plays out.
That means investors like you should continue to play defense. Focus on higher-yielding, stable companies in less economically sensitive sectors. My favorite picks are in my Safe Money Report, which you can get your hands on here.
Watch the yield curve, too. It continues to flatten relentlessly — a sign the bond market is continuing to buy into the slowdown idea. The last time this happened was 2007, one of the single-worst times to buy stocks in the 21st century. Food for thought.
Until next time,