Last week, I was on vacation with my family and like any good investor, I kept my eyes and ears open to see what vacationers were doing and spending. Much like walking the malls and counting shopping bags during the year-end holiday season or during the back-to-school season, observing fellow vacationers at amusement parks, waters parks and at the beach can prove insightful. The same goes for how crowded those attractions and restaurants might be. Based on my travels and observations, I have to say that things are not that upbeat out there. This confirms the data that we received during the second quarter of 2012, and thus far in July and we are seeing that reflected in corporate earnings this week.
Backing up just a tad, the latest data from the JP Morgan Global All-Industry Output Index showed the global economy skirted closer to stagnation at the end of the second quarter. The June reading for that index, which slipped to 50.3 in June, down from February's 12-month peak of 55.4, revealed that growth slowed in the service sector and manufacturing production fell back into contraction territory.
Not surprisingly, confidence levels for consumers and businesses have weakened compared to readings earlier this year. This does not bode well for near-term economic activity -- neither a business nor a consumer is likely to take on more, be it in terms of spending or expanding what they are doing if their confidence is waning.
According to its Global Business Outlooks Survey, which queries 11,000 companies worldwide, Markit Economics found that global business confidence waned in June. In particular, business optimism remained weak in the eurozone in June. Confidence had revived earlier this year, but the survey revealed that business sentiment has again suffered a set-back. A more granular view shows confidence fell especially sharply in Germany, and falls were also seen in Italy and Spain. Declines in business optimism were also found in the U.S., Britain, China, Brazil and Russia per Markit.
With confidence levels falling, companies have adjusted their employment plans to match less-positive views on business activity, business revenues and corporate profits compared to expectations seen earlier this year. Weaker employment growth was signaled for the U.S., Britain and China per Markit's findings, while eurozone employers expect a net fall in employment in the coming year. In other words, we should not be expecting a dramatic upturn in job creation in the current quarter from that in the second quarter of 2012, which averaged only 75,000 jobs per month according to the Bureau of Labor Statistics. Keep in mind that level of job creation was significantly slower than the 677,000 jobs added during the first quarter of 2012.
Confirming the notion of slower job creation ahead, 62 percent of U.S. businesses project no change in employment over the next six months, according results of a National Association for Business Economics' survey released today. That compares to a reading of 48 percent in the April survey. The association's June survey also uncovered company concern about the increasingly talked about fiscal cliff -- 65 percent of those surveyed predicted sales will drop if this fiscal cliff can't be avoided -- should Congress not act to extend the George W. Bush-era tax cuts into next year and the $1.2 trillion in automatic spending cuts take place.
In aggregate, the down vector and slowing velocity of the global economy has ratcheted up expectations for further easing by the Federal Reserve. While many are waiting to see what the Fed does, the question that few are asking is: Has all of the would-be stimulus and quantitative easing we have gotten from the government and the Fed addressed the problems at hand?
My take is that it has been nothing more than a temporary Band-Aid that has covered over symptoms of the much larger, underlying problem rather than address it. As hospitality expert James Sinclair once said, "We know that throwing money at the problem doesn't fix it -- it extends the life of the problem."
• Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on twitter @chrisjversace. At the time of publication,Mr. Versace had no positions in companies mentioned; however, positions can change.
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Chris Versace, the “Thematic Investor,” is the director of research at Think 20/20, an independent equity research and corporate access firm located in the Washington, D.C. area. Before Think 20/20, Mr. Versace was the portfolio manager of Agile Capital Management (ACM), a thematically driven alternative investment fund. The groundwork for ACM was laid during Mr. Versace’s tenure as senior vice president of equity ...
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