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G20 Summit Room in Canada
Is the USA Recovery Sustainable?
USA Sovereign Debt Of note the week of May 31 was the funded federal debt exceeding $13 trillion! Even more incredible is the USA GDP is approximately $14.5 trillion. So funded federal debt is rapidly approaching the total of the entire American economy. The debt totals can be seen at USDebtClock.org. There will be a Day of Reckoning as Congress cannot stop spending, be they Republicans or Democrats. Federal spending has taken on a life of its own as Congress sends home the pork, receives the earmarks, and spends on programs that are politically advantageous. I do not think the USA federal budget can be balanced - now, again, ever.
Overview Sentiment is "cautiously optimistic" about the global recovery. Asia-Pacific is the most robust economic region while there is uncertainty about Europe's sovereign debt, financial system, and economic recovery. USA leading economic indicators are signalling the recovery is slowing down, perhaps even stalling. USA unemployment and underemployment remains high, bank lending continues to contract, housing starts have plunged, durable goods orders are down, and the Q1 GDP was unexpectedly revised downwards. Yet USA manufacturing shows surprising strength and sustainability.
USA Leading Economic Indicators The Economic Cycle Research Institute reported their Weekly Leading Index fell yet again on June 25 and a 7 week downtrend has now occurred which results in the WLI falling back to December 2007 levels, which was at the beginning of the Great Recession. Lakshman Achuthan of ECRI says no persistent downtrend and therefore no double dip recession yet. The Conference Board reported the USA Leading Economic Index bounced back to +0.4% (preliminary) in May. This is encouraging data and maintains the uptrend. The LEI monthly increases (revised) in 2010 have been April 0.0%, +1.4% in March, +0.4% in February, and +0.6% in January. Since the equity markets are also considered leading indicators, this data has become neutral overall for USA equities, one leading indicator down, one up.
USA Unemployment (Jobs!) The weekly unemployment claims are not indicating a robust or even major economic recovery, even though a lagging indicator. The 4-week moving average is 462,750, which has shown no improvement in 6 months. The BLS May Employment Situation report was disappointing and has had a bearish effect on equity markets. Even though the unemployment rate decreased to 9.7% from 9.9% and total jobs increased +431,000, the private sector generated only +41,000 jobs while the public sector increased by +390,000. In April, the private sector created +218,000 jobs. Obviously, we all can't work for the government and it's the private sector job growth that will create a viable USA economic recovery. The May U-6 unemployment rate (Table A-15, seasonally adjusted) was 16.6%, down from 17.1% in April.
The Gallup Poll reported underemployment in May at 19.1%, compared to 18.9% in April, which was disappointing. However, The Conference Board's Employment Trends Index increased in May for the ninth consecutive month, is up +9% YoY, and "jobs will likely expand further in the next several months". Perhaps Michael Derby in the Wall Street Journal is correct, "Natural Jobless Rate Seen Shifting Higher", that structural changes in the USA economy are creating a "new normal" of higher unemployment.
USA Economic Trends USA economic data had been overall positive but uncertaintly about the strength of the recovery is increasing. Dips (such as the recent Philadelphia Fed economic report, May housinng starts, and weekly unemployment claims) are occurring along the way. The problem is the data is not all going in the same way to indicate anywhere near a robust recovery. Durable goods orders in May were down -1.1% MoM, yet the machinery was +5.6% MoM. Freight traffic (sea, air, rail, truck) continues to grow, but there are signs in trucking it is cooling off. University of Michigan USA consumer sentiment for June hit a new high, highest in 2 years, yet USA May retail sales decreased for first time in 8 months. China exports continue to show strong growth. How significant the ultimate impact of the BP Gulf Oil Spill will have regionally and nationwide remains to be seen, but obviously it is negative.
The Fed The Federal Open Market Committee (FOMC) statement on June 23 stated, "The economic recovery is proceeding". The June 9 Fed Beige Book reported was "economic activity continues to improve". Also on June 9, Fed Chair Bernanke stated to Congress "the recovery in economic activity...has continued at a moderate pace". "Moderate" is the current theme of the Fed & Bernanke: moderate growth, moderate pace, etc.
USA GDP The BEA "Third Estimate Final" for Q1 2010 was unexpectedly revised downwards to +2.7%, after the "Second Estimate" has been +3.0% and the "First Estimate" was +3.2%. The Q4 2009 was +5.6%. Economist Peter Morici has some comments about GDP and the BLS May jobs report here, "Halting Recovery Keeps Unemployment High". Morici states that the USA needs about +3.0% GDP growth to "pull down unemployment" and that recent actual GDP growth has been +2.0%.
World Economic Trends Economic data has been overall positive for most of the World, especially the Asia-Pacific region. Europe is now the weak link in the global recovery but the Euro Area might eke out some GDP growth for 2010 per the ECB. China and Asian exports continue to show strong growth. Japan has raised their economic assessment, but still cautious. However, OECD composite leading indicators have slowed down indicating continued but slower global growth. The semi-annual IMF World Economic Outlook (April 2010) is reviewed here. The Baltic Dry Index is decreasing but technology, such as semiconductors are booming.
Europe Sovereign Debt Crisis Fear ebbs and flows about the European Union. The immediate concern is the viablity of the Spanish banking system, which would then lead to concern about their soovereign debt. Both Spain and Greece have sold debt, bonds, and the auctions were successful. The Euro has rallied and the EUR/USD closed the week on June 18 at 1.23679, after a bottom on June 6 of 1.18971. The daily and weekly rise and fall of the Euro has been an indicator of the uncertainty, and at times fear, in the global markets and financial system regarding the viability of Greece, Spain, the EU, and ultimately the Euro.
USA Leading Economic Indicators The Economic Cycle Research Institute reported their Weekly Leading Index fell yet again on June 25 and a 7 week downtrend has now occurred which results in the WLI falling back to December 2007 levels, which was at the beginning of the Great Recession. Lakshman Achuthan of ECRI says no persistent downtrend and therefore no double dip recession yet. The Conference Board reported the USA Leading Economic Index bounced back to +0.4% (preliminary) in May. This is encouraging data and maintains the uptrend. The LEI monthly increases (revised) in 2010 have been April 0.0%, +1.4% in March, +0.4% in February, and +0.6% in January. Since the equity markets are also considered leading indicators, this data has become neutral overall for USA equities, one leading indicator down, one up.
USA Unemployment (Jobs!) The weekly unemployment claims are not indicating a robust or even major economic recovery, even though a lagging indicator. The 4-week moving average is 462,750, which has shown no improvement in 6 months. The BLS May Employment Situation report was disappointing and has had a bearish effect on equity markets. Even though the unemployment rate decreased to 9.7% from 9.9% and total jobs increased +431,000, the private sector generated only +41,000 jobs while the public sector increased by +390,000. In April, the private sector created +218,000 jobs. Obviously, we all can't work for the government and it's the private sector job growth that will create a viable USA economic recovery. The May U-6 unemployment rate (Table A-15, seasonally adjusted) was 16.6%, down from 17.1% in April.
The Gallup Poll reported underemployment in May at 19.1%, compared to 18.9% in April, which was disappointing. However, The Conference Board's Employment Trends Index increased in May for the ninth consecutive month, is up +9% YoY, and "jobs will likely expand further in the next several months". Perhaps Michael Derby in the Wall Street Journal is correct, "Natural Jobless Rate Seen Shifting Higher", that structural changes in the USA economy are creating a "new normal" of higher unemployment.
USA Economic Trends USA economic data had been overall positive but uncertaintly about the strength of the recovery is increasing. Dips (such as the recent Philadelphia Fed economic report, May housinng starts, and weekly unemployment claims) are occurring along the way. The problem is the data is not all going in the same way to indicate anywhere near a robust recovery. Durable goods orders in May were down -1.1% MoM, yet the machinery was +5.6% MoM. Freight traffic (sea, air, rail, truck) continues to grow, but there are signs in trucking it is cooling off. University of Michigan USA consumer sentiment for June hit a new high, highest in 2 years, yet USA May retail sales decreased for first time in 8 months. China exports continue to show strong growth. How significant the ultimate impact of the BP Gulf Oil Spill will have regionally and nationwide remains to be seen, but obviously it is negative.
The Fed The Federal Open Market Committee (FOMC) statement on June 23 stated, "The economic recovery is proceeding". The June 9 Fed Beige Book reported was "economic activity continues to improve". Also on June 9, Fed Chair Bernanke stated to Congress "the recovery in economic activity...has continued at a moderate pace". "Moderate" is the current theme of the Fed & Bernanke: moderate growth, moderate pace, etc.
USA GDP The BEA "Third Estimate Final" for Q1 2010 was unexpectedly revised downwards to +2.7%, after the "Second Estimate" has been +3.0% and the "First Estimate" was +3.2%. The Q4 2009 was +5.6%. Economist Peter Morici has some comments about GDP and the BLS May jobs report here, "Halting Recovery Keeps Unemployment High". Morici states that the USA needs about +3.0% GDP growth to "pull down unemployment" and that recent actual GDP growth has been +2.0%.
World Economic Trends Economic data has been overall positive for most of the World, especially the Asia-Pacific region. Europe is now the weak link in the global recovery but the Euro Area might eke out some GDP growth for 2010 per the ECB. China and Asian exports continue to show strong growth. Japan has raised their economic assessment, but still cautious. However, OECD composite leading indicators have slowed down indicating continued but slower global growth. The semi-annual IMF World Economic Outlook (April 2010) is reviewed here. The Baltic Dry Index is decreasing but technology, such as semiconductors are booming.
Europe Sovereign Debt Crisis Fear ebbs and flows about the European Union. The immediate concern is the viablity of the Spanish banking system, which would then lead to concern about their soovereign debt. Both Spain and Greece have sold debt, bonds, and the auctions were successful. The Euro has rallied and the EUR/USD closed the week on June 18 at 1.23679, after a bottom on June 6 of 1.18971. The daily and weekly rise and fall of the Euro has been an indicator of the uncertainty, and at times fear, in the global markets and financial system regarding the viability of Greece, Spain, the EU, and ultimately the Euro.
EU Bank Stress Tests The EU is to release bank stress tests results of the major European banks in late July, to disclose the state of the EU financial system. However, sovereign debt exposure of the banks to the EU countries of concern is reportedly not going to be revealed. We'll see - I think the pressure will be intense to disclose this information and it will probably be reported. Moody's reported June 11 that Europe's major banks can absorb sovereign debt losses from Greece, Portugal, Ireland, and Spain.. Legitimate stress tests will prove that one way or another.
EU Economy Positive news has kept the crisis from being total gloom. The EuroZone industrial output surged in April and Euro Zone industrial orders were very strong in April . The IMF and EU have so far kept pressing Greece, Spain, Portugal, Ireland, and Italy (the PIIGS) to implement strict fiscal austerity plans. Ultimately, it will be if the PIIGS do continue with the austerity measures, over 2-3 years, that will restore confidence in Europe.
EU Economy Positive news has kept the crisis from being total gloom. The EuroZone industrial output surged in April and Euro Zone industrial orders were very strong in April . The IMF and EU have so far kept pressing Greece, Spain, Portugal, Ireland, and Italy (the PIIGS) to implement strict fiscal austerity plans. Ultimately, it will be if the PIIGS do continue with the austerity measures, over 2-3 years, that will restore confidence in Europe.
EU Investor Confidence First Greece overspends, then the EU, ECB, and IMF bail the Greeks out, then fear of contagion to Portugal, Ireland, Spain, perhaps Italy and even UK increases. Spain has been downgraded by Fitch from AAA to AA and on May 28 the French Budget Minister said France could not ultimately maintain their AAA credit rating. First Greece was downgraded and crisis ensued, then Spain was downgraded - next Portugal and Ireland, then later Italy? The value and viability of the Euro itself continues as suspect, along the EU banking system and overall EU financial and economic system. Until the world is convinced the EU can hold together and remain viable, market fear and volatility will continue and the USA equity markets are in limbo with little hope of regaining the 2010 YTD highs.
EU: IMF & USA The more the IMF intervenes to bailout the EU, the more the USA does, since the USA contributes billions to the IMF. USA taxpayers to the rescue! The EU appears to have solved the liquidity crisis, but whether the solvency crisis can be ultimately be resolved is in doubt. Hence, the viability of the EU is in question. Nouriel Roubini summed up the Euro Crisis here. The four largest economies in the EuroZone are Germany, France, Italy, and Spain.
USA Financial Regulatory Reform Meanwhile, back in the USA, the political battle continues to reform the financial system, which creates uncertainty first within the financials sector and then within the markets. The latest Congressional compromise dilutes the reform to a point it is a sham. After any financial reform is passed by Congress, this should eliminate the uncertainty for at least the rules of the road, and then the related financial system impact can be determined. If Congress waters down the final reform bill, then the financial system is truly rigged and the greatest bank robbery in the history of the world will continue, paid for in the past, now, and in the future by the American taxpayers.
USA Financial Regulatory Reform Meanwhile, back in the USA, the political battle continues to reform the financial system, which creates uncertainty first within the financials sector and then within the markets. The latest Congressional compromise dilutes the reform to a point it is a sham. After any financial reform is passed by Congress, this should eliminate the uncertainty for at least the rules of the road, and then the related financial system impact can be determined. If Congress waters down the final reform bill, then the financial system is truly rigged and the greatest bank robbery in the history of the world will continue, paid for in the past, now, and in the future by the American taxpayers.
USA Sovereign Debt Of note the week of May 31 was the funded federal debt exceeding $13 trillion! Even more incredible is the USA GDP is approximately $14.5 trillion. So funded federal debt is rapidly approaching the total of the entire American economy. The debt totals can be seen at USDebtClock.org. There will be a Day of Reckoning as Congress cannot stop spending, be they Republicans or Democrats. Federal spending has taken on a life of its own as Congress sends home the pork, receives the earmarks, and spends on programs that are politically advantageous. I do not think the USA federal budget can be balanced - now, again, ever.
When the Day of Reckoning will be, I do not know: 1 year? 5 years? 10 years? The Peter G. Peterson Foundation has the best information on this national disgrace (dysfunction?) here. David M. Walker, the former Comptroller General of the United States, is the CEO of the Foundation and has been warning about this impending disaster for years. On June 10, Mr. Walker stated, “We’re worse than Ireland. We’re two years away from being Portugal and 10 years ago from being Greece.” Former Fed Chair Alan Greenspan warned on June 17 the USA may soon reach the borrowing limit and a "tectonic shift" in fiscal policy is required.
USA States Fiscal Crisis There is also the same debt risk concerns for USA states, cities, and smaller government entities. Illinois and California are the of most concern for default risk, but many states struggling to balance the budges, including New York.
Goldman Sachs & The USA Financial System The SEC fraud charges, and more claims under investigation, against GS also bring into question the fairness, validity, and viability of the USA financial system. JP Morgan settled a subprime fraud with Massachusetts for $102 million on June 24. The Europeans are investigating GS and Merrill Lynch of Bank of America, Deutsche Bank, et.al. There has even been a call for China to investigate Wall Street. Until the Wall Street Banksters are brought to justice and financial system reform is implemented, the USA financial system is a fraud and corrupt - the USA taxpayers and citizens are being defrauded. These investigations and charges will drag on indefinitely, probably for years. Markets could be impacted off and on as more Wall Street Banksters are hopefully removed from the financial and market systems. More financial institutions will be hunted down and an examples made of them. The 3 credit rating agencies, S&P, Moody's, and Fitch also have gamed the system. So there will be ongoing market reactions, just as with the EU, to contend with.
USA Quarterly Earnings Season The markets await the second quarter results to be reported soon. First quarter earnings were very encouraging, especially in the technology, financial, and industrial sectors that I pay special attention to.
USA Flash Crash! The fairness, objectivity, and validity of the entire USA equities markets, and other markets, is under suspicion. On June 22 the ongoing investigation reported the Flash Crash was a confluence of events, not the result of a single contributing factor. Frankly, I think the entire USA financial and market system is being questioned. The May 6, 2010 Flash Crash amplified and maginified the ongoing USA financial system debacle. Are we being totally gamed, and controlled, by Wall Street? Will the USA government take control and stop the Wall Street Banksters?
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