Our two guiding principles:

- Human nature changes very slowly over time, if at all. Therefore, history is relevant because human beings will react to similar circumstances in similar ways. The trick, however, is to find the relevant piece of history on which to draw parallels. In this sense, forecasting is an art, not a science.

- The objective of forecasting is to identify the significant but undiscounted aspects of the outlook. This is where the true opportunities for investors lie and where business can get the jump on competitors. A rehash of the consensus view, which is fully discounted in security markets and business plans, is of limited value.

July 25, 2014 Update from Gary Shilling: NO SPRING THAW

The consensus of economists looks for second quarter real GDP growth, which will be released July 30, of 3% vs. the first quarter at annual rates.  It believes the 2.9% drop in the first quarter was cold weather-driven, and a rebound in the second quarter is the prelude to 3%-plus growth in the second half of the year.  As in the last several years, the herd is likely to be disappointed.

Consumer spending is 69% of GDP and it barely grew in the quarter.  According to monthly data, real consumer spending fell 0.2% in April and 0.1% in May.  June’s numbers aren’t released yet, but based on the correlation with retail sales, which are available for June, real consumer outlays rose just 0.1%.  The jump in March from weak January and February gave consumer spending a higher starting point for the second quarter so we believe it rose 1.3% from the first quarter.

With the ongoing business cost-cutting and job growth focused on hamburger flippers, hotel desk clerks and other low-paid jobs, real wage growth to support consumer spending has been absent.  Emphasis has also been on lower-paid part-time jobs.  In June, they rose 1.1 million while full-timer positions dropped 708,000.

Elsewhere, real federal as well as state and local spending probably continued their declining trends.  Plant and equipment spending didn’t help much.  Volatile durable goods shipments rose just 0.5% in the second quarter from the first at annual rates, and that’s before reductions for inflation.

Residential construction was probably weak in the second quarter following declines in the fourth and first quarters.  The earlier recovery in housing was driven by rentals, not new homeowners who are suppressed by uncertain jobs, low credit scores, the lack of 20% downpayments, huge student loan debts and the knowledge that house prices can and did fall by one-third.  New home sales, the sequel to recent new building, slid 8.1% in June from May and were off 3% in the second quarter from the first.

After declines in April and May in total private residential and nonresidential construction, June’s numbers, yet to be reported, would have to be the highest this year to keep the second quarter total from falling from the first quarter, before inflation reductions.

Net exports, the difference between U.S. exports and imports, were weak in April and May.  Even with a $2 billion improvement in June, the quarterly total would knock $22 billion, or 0.5 percentage points, off annual real GDP in the second quarter.  Note that the $70 billion drop in the first quarter cut real GDP by 1.5 percentage points.

The big unknown, as usual, is inventory investment.  Since it’s the difference between sales and production, it’s highly volatile and notoriously subject to revisions.  But barring a big jump in inventories, the second quarter real GDP growth was probably a lot closer to 1% than 3%.  It could even be a negative number.

A low second quarter real GDP number will kill the conviction that the first quarter drop was only an anomaly and it will spawn agonizing reappraisals for the rest of the year.  It could put the Fed on hold at least into 2016 and be great for Treasury bonds.  But for stocks, look out below!