Market Crash Ahead? Don’t Be Deceived By Spending-Fueled ‘Boom’

U.S. stocks are setting records amid expectations for a better economy and plenty of spending. All bets are on good times ahead and market valuations reflect this optimism. But, what if those expectations are wrong?

The economy may not be as healthy as you think.

Sure, recent indicators have shown evidence of green shoots. Just look at last month’s surge in retail sales and this past week’s plunge in jobless claims if you want to feel good about the future. The problem is: these numbers may not may not be quite as promising as investors think.

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We’re in a spending-fueled boom that makes everything seem shiny on the surface, but when you dig deep, there are some deeply troubling signs for the U.S. economy. 

Consider this: retail sales surged in March by almost 10%–far more than the forecasted 6.1%. But, would sales have spiked if the government hadn’t sent $1,400 taxpayer-funded fiscal stimulus checks to nearly every American? And, what happens this and next month when those checks are no longer in the mail?

Meanwhile, there are indications this “recovery” isn’t as widespread nor as strong as some think. U.S. Industrial Production is still lagging behind this so-called “boom,” rising by just 1.4% in March (or 1% year-over-year.) This follows a 2.6% drop in February (primarily attributable to the storms that shut down part of the country.)

In addition, though unemployment claims fell by 193,000 in the week of April 10th, a part of this decline can be attributed to the problems in processing jobless benefits applications, especially in the case of the 75,645 drop in California.

Further complicating America’s economic future — the labor force participation rate remains low. Currently, over 100 million Americans are out of the labor force, yet the labor force participation rate is still about 2 percentage points lower than the pre-pandemic levels.

See below how much the labor participate rate has plummeted. Is this the new normal?

If fewer people are inclined to work in this changing economy, then the drop in unemployment claims might not be indicative of a stronger economy, but rather of people deciding to stop looking for work. In fact, a recent census survey showed that about 4 million Americans said that they are not looking for work because of fear of COVID-19. (It’s worth asking, could the Biden stimulus checks have anything to do with that? After all, if you can be paid NOT to work, some might consider that a logical path to pursue.)

Bottomline: don’t just a book by its cover, or in this case the economy by its shiny surface. The boom in spending, while employment and production lag behind, could really be a mirage…and the healthy recovery is, in fact, neither healthy nor a recovery.

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