Are you going to get together around the grill this holiday? Time to get to see family and friends. My informal survey of relatives and neighbors tells me the same story. Americans across the country are ditching traditional pastimes. Instead, they are dusting off the Weber grill and breaking out a few beverages of their choice, and spending time at home this holiday.
If you’ve ever wondered how this gigantic economy heads into recession, this is how it happens. People simply stop spending. They are no longer making long trips to the shore or the mountains. What usually is one of the significant driving holidays of the year is making way for a stay-at-home weekend. In its place, the backyard patio will do quite nicely.
And the reason is apparent: the stratospheric price of gasoline. Why waste all that money driving to some far-off vacation spot? When you can save, by just staying at home.
And don’t think you’re alone in that decision. I sense that millions are doing the same. And collectively, this move to “spend a little less” is beginning to show up in the primary economic reports.
As we noted earlier, the country’s Gross Domestic Product was marked lower, primarily on the slow down in consumer spending. Actual spending by Americans like you and me dropped by nearly one-half percent in the first quarter of this year. And remember, the price of gas back then was much lower.
And it’s just this ability to connect the dots. To put together real-world experience and financial data that is the market of an exceptional investor.
One of the best at this kind of thinking is Peter Lynch, the legendary mutual fund manager. For over 20 years, Peter guided the Magellan Fund. The Fund had one of the best records of all time.
He did so by using this logic, matching sky-high energy prices with the growing threat of recession, and concluding that many will spend this three-day holiday in their own backyard.
People are worried right now, especially about their financial future. And Peter, along with many others on the Street, recognizes this.
In my opinion, this second point, this financial worry, will be the defining characteristic of the second half of 2022.
People who are concerned about losing their job or making ends meet don’t spend extra money. They eat outmuch less than before and shop for fewer new clothes or discretionary items. Purchases of new cars, TVs, and electronics go way down. In times like this, people automatically lower their lifestyles.
This tendency to spend less might also be a contributing factor to the Cryptos markets. Bitcoin has declined over 70% from its highs last November. Could it be that investors don’t want to speculate right now? They have more important things to do with their money. Especially if that recession everyone talks about really does happen.
Finally, let me add one more dimension to our discussion. Until now, we’ve been describing a run-of-the-mill recession. A gentle transition to economic contraction. Economic contractions are a natural part of the business cycle.
You may have noticed how everyone on Wall Street has been pointing to the gain last quarter in personal income. They’re saying, in essence: that times may be challenging, but at least you have your salary.
But here’s the problem: your actual, after-inflation income is not rising. It’s falling. In that latest report on the nation’s GDP, personal income gains fell by half if you adjusted for inflation.
In other words, the average American’s income is falling behind the inflation rate.
In a word, we live in a world that is the very definition of Stagflation. CPI Inflation is rising at 8.6%, while the economy is declining at 1.6%.
It looks like the perfect time to bring out the backyard grill.
All eyes will be focused on the latest release of the Purchasing Managers Index. The PMI is a particular favorite of Wall Street. After all, before you can make something, you have to first buy the raw materials and components to construct your new product. So the Purchasing Managers Index measures the very first step in the industrial process. A PMI above 50 shows an expanding economy. Below 50, the industry is contracting.
The Purchasing Managers Index peaked last November, like so many economic indicators. And is been a pretty even decline ever since. Wall Street expects another decline for this June reading. The real question is: just how far a decline will we see?
There are no earnings reports scheduled for today.
Have a Wonderful Independence Day!