GDP and Credit Trends Are Not Your Friends

The Street - JEREMY LAKOSH | AUG 28, 2016 | 2:00 PM EDT

Friday morning, the government released data suggesting growth is slightly lower than we first expected. In the second release of Q2 GDP, the government estimates growth now at 1.1% vs. 1.2% in its first release. While not initially alarming, the data within the GDP report, combined with other numbers I've received this week certainly suggests a slowing.  

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The government likes to take quarterly economic growth and multiply it by four to get an annualized GDP figure (red line in chart above), but I like to look at economic growth on a year-over-year basis (blue line above). The slide in year-over-year growth to 1.2% from 3% is not only the largest of this business cycle, but it has also occurred across the most consecutive quarters.

Simply put, the economy as a whole is slowing.

By digging deeper, it becomes evident that the falloff in GDP growth is being sourced from the strong decline in investment spending. Just Thursday, I sold my position in an industrial equipment mutual fund due to the apparent challenges in that sector.

Consumer spending, which accounts for 70% of the economy, continues to carry growth, but the fact that investment growth went negative in late 2006 before the previous recession had any indicators does slightly haunt me.

Outside of economic growth, recently released data regarding consumer credit causes some concern. While coming off of strong quarters in 2014 and 2015, consumer credit expansion is slowly beginning to decrease. This is an important indicator as it effects consumer spending and the credit markets, which are vital to economic growth.

The trend is not as alarming as the GDP trend, but investors should monitor it for continued deterioration.

Consumer credit delinquencies, after declining from 2011 to 2015, have increased for the last three quarters. As the delinquency growth approaches 10%, it's important to note that a similar trend occurred without a recession in 2004; however, the trend quickly abated.

Whether delinquencies continue to grow in future quarters is paramount, in my opinion, to the health of the economy. Also, it is important to note that this growth is coming off of historically low levels. Still, it appears the percentage of total loans that are delinquent is poised to rise.

Bringing it all together, what does this mean for business performance? In examining monthly business sales and inventory data, I have noticed that business sales have been flat to negative on a year-over-year basis since early 2015. While the latest earnings reports bring some optimism, I'm concerned that all of this data will eventually spill into the employment markets.