Wall Street economists and portfolio managers continue to debate whether the U.S. economy is about to enter a recession and whether or not stock prices may have bottomed.
Meanwhile, the majority of leading economic and stock market indicators suggest that economic growth in the U.S. will continue to slow over the coming months.
These indicators also suggest that stock prices will continue to trend lower.
For example, the growth in the M2 money supply slowed considerably over the past few months, expanding at a year-over-year rate of only 5.8 percent during January, versus 6.4 percent last September.
Meanwhile, the construction of new homes has continued to trend lower, initial claims for unemployment benefits have continued to rise, and consumers' confidence in future economic conditions has continued to decline. Other leading indicators also support a slowdown in the U.S. economy.
Historically, whenever a preponderance of leading economic indicators pointed to a significant slowdown in economic growth, stock prices have fallen sharply over the ensuing months.
For example, the S&P 500 Index declined 49 percent between March 2000 and October 2002, after a majority of leading economic indicators turned negative during February 2000.
An array of economic indicators suggest that the U.S. economy will grow at a sluggish pace over the next several months, yet inflationary pressures have continued to mount.
For example, the consumer price index (CPI) rose at its fastest pace during January (4.4 percent) in more than 16 years, excluding the effects of Hurricanes Katrina and Rita in September 2005.
Although some Wall Street economists claim that inflation rates are still no where near their levels during the stagflation environment that existed during the 1970s, they fail to mention one important fact: Changes in the way the government computes the CPI grossly underestimates actual price increases in all types of goods and services.
In fact, if the government still calculated the CPI in the same way that it did during the 1970s, this key measure of consumer inflation would have risen at a year-over-year rate of approximately 11.4 percent during January.
In comparison, the annual change in the CPI rose to a high of 12.2 percent during November 1974.
Hence, I would argue that the self-serving Wall Street economists who claim that the current rate of inflation is nothing like it was during the 1970s are merely misleading investors. Gee, what a surprise!
Yesterday morning, Federal Reserve Chairman Ben Bernanke acknowledged the significant slowdown in the U.S. economy that I've repeatedly warned you about over the past several months.
Bernanke said: "The economic situation has become distinctly less favorable … [and] … the incoming information since our January meeting continues to suggest sluggish economic activity in the near term."
Bernanke also said that consumer spending has slowed significantly and that "recent indicators point to some slowing of foreign economic growth."
In regards to inflation, Bernanke said that consumer price inflation has increased since its previous economic report because of the sharp run-up in the price of oil.
He added that any further increases in the prices of energy and other commodities add to inflationary pressures.
So, rather than listening to the Wall Street cheerleaders, listen to the facts.
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