Macroeconomics of a slowing economy

We have had a great rally in the last 3-4 years, now all signals point to a slowing economy. Actually, I should correct myself: We are in a period of mixed signals, but I view this as nothing but a transition from growing economy to slowing economy. If we wait for clear signals, we may have lost the boat.

Housing is slowing with home stock going down. With housing down consumer spending will decrease as consumers can not finance any more debt and will be thinking about saving (Who American, No Way!!!). Additionally, recent reports have shown that more CEOs are withholding capital investment than are thinking of increasing it. So, with consumer spending - one that contributes 65% to the total economic spending - slowing and business not ready to picking up the slack, overall demand growth will be difficult to sustain.

The above logic may fail as we have an unpresedent low unemployment rate. So, consumer income can provide a growth avenue to sustain consumer spending growth. But, I think unemployment rate has nowhere to go but up as we are at or below the natural unemployment. Additional income growth can only come from increased labor rates which finally hits the reason why we invest - corporate profits.

Another argument is that recent reduction in comodity prices and especially oil prices will give consumers more money to invest. I disagree with this argument as first we will not see any effect of these oil prices on our neighbourhood gas pump anytime soon. Also, recent events have proved , at least to me, that US consumer spending is not very sensitive to the oil prices in the range $55-$75.

So, if you agree with me that the economy is going to slow down. how should we change out investing strategy? This issue will be tackled in another post later this week.