Don’t let complacency cost you

Rick_PendergraftThere were two economic reports that came out last week that raised serious red flags for me. The first was the Conference Board’s Consumer Confidence report and the second was the final adjustment to the first quarter GDP report.

Both reports give me some information to be intrigued about. And as I connect all the dots from various sources of information, I’m beginning to grow more and more worried. Here is why:

The Consumer Confidence report, which measures consumers’ confidence in the economy’s near future, came in at a reading of 85.2, which is the first time the indicator has been above the 85 level since January 2008. At that time, the indicator was in a downward trend as the recession was just starting. The peak in the Consumer Confidence report came at 111.2 in February 2007.

The final look at the first quarter GDP growth rate was adjusted downward to -2.9% to show the worst growth rate since the second quarter of 2009. The growth rate in the second quarter of 2009 was -5.4%, and that was an improvement over the first quarter rate of -8.3%. These readings came at the end of the “great recession” and at the end of the bear market that lasted from the fourth quarter of 2007 through the first quarter of 2009.

These two developments come as we are getting ready to head into the next earnings season. The unofficial second quarter earnings season will kick off on Tuesday when Alcoa (NYSE: AA) will report their earnings after the closing bell. For the most part, earnings have been improving over the last five years as the market and economy have rebounded. Unfortunately, the bulk of the improvement in earnings has been as a result of cost cutting rather than revenue increases.

Improved earnings are a good thing from an investor’s point of view, but you would rather see an increase in revenue as the driver behind the earnings increase. Over the long haul and as far as the overall economy is concerned, the economy must grow as consumers spend. Cost cutting has the opposite effect of a revenue increase because, as company’s cut their labor costs or their capital expenditures, that leads to workers and other companies earning less.

Net Exports were another concern as they came in at their lowest level since the fourth quarter of 2011. While consumer spending has been increasing, it isn’t rising fast enough to grow the economy. When you combine that with a decline in net exports, you see why the GDP growth rate came in at -2.9%.

The bottom line is that our economy is shrinking, our net exports are declining, and the market is at an all-time high. Does that make any sense to you? I hope you said no, because it shouldn’t make sense. I am concerned that investors could be caught off guard during this next round of earnings. And even if they aren’t caught off guard this quarter, the trends in economic indicators and consumer confidence do not make sense and they will catch up with this market at some point.

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