September 4, 2013

Slowing Growth; Radian; GDP: Best of Kass -

For several months I have maintained that expectations for domestic economic growth and corporate profits were too optimistic and that the landscape was growing more challenging.

This view contrasted with the consensus that U.S. economic growth would accelerate markedly in the second half of the year, laying the framework for self-sustaining economic growth and profit prosperity into 2014 and beyond.

The expectation of an acceleration in domestic growth is now fading and is likely the primary reason why stocks have corrected. Further complicating the situation is that most of the Fed members want to taper into what appears, increasingly, as slowing growth. So a policy mistake might be made in the weeks ahead.

This morning the income/spending Milwaukee Manufacturing Index came in weaker than expected. The Chicago Index was in line with consensus (signaling slightly-below-trend activity in the Midwest). Confidence declined in August from a six-year high in July.

Sub-par 2% second-half real GDP remains my expectation.

Many brokerages have lowered their 3Q 2013 real GDP forecasts this morning (Goldman Sachs to +1.8% from +1.8%, Morgan Stanley to +1.9% from +2.2%, Nancy Lazar (one of the biggest supporters of accelerating growth) cut her forecast, as did ISI's Ed Hyman, and Macroeconomic Advisors went to +1.6% from +2.2%.)

More lower economic forecasts lie ahead and with it will be lower forecasts for corporate profits, providing a backdrop for limited upside to markets at best.

At worst (my baseline expectation), the S&P Index still has an appointment with 1550-1600.