Saturday, July 17, 2010

Economic & Market News: USA Economic Recovery Slows (Weekly Update)

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Fed: USA Economic Recovery Is Going To Take A Few Years


USA GDP 2010 Projections 3.0% - 3.5% 

Overview Sentiment is "cautiously optimistic" perhaps leaning to "extremely cautious optimism" about the global recovery but it appears a second half 2010 slowdown is in progress for the world and the USA. 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.

USA Quarterly Earnings Season Earnings season began this past week and it is not going well overall. Bank of America, Citigroup, and General Electric were a disappointment with low revenues yet high profits. This indicates that cost cutting, not demand, is driving up profits . This next week should determine the mood of the market towards earnings season - bullish or bearish. First quarter earnings were very encouraging, especially in the technology, financial, and industrial sectors but the second quarter needs to exceed.

USA Leading Economic Indicators The Economic Cycle Research Institute Weekly Leading Index is at 120.6 which is the lowest since the week of July 24, 2009. 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 GDP The consensus USA 2010 GDP estimates now appear to be about +3.0% to +3.5%. The release of the FOMC meeting minutes on July 14 included the Summary of Economic Projections by the 17 FOMC members. The USA 2010 GDP projection had been lowered from +3.2%/+3.7% to +3.0%/+3.5%. The Blue Chip Economic Indicators of survey of economic forecasters reported a decrease in USA 2010 GDP consensus to +3.1% from +3.3%. The IMF revised their USA 2010 GDP from +3.1% to +3.3% on the June 30 partial update of the World Economic Outlook. This update is reviewed here, "World Economy Recovering Better Than Expected, But Downside Risks Have Risen Sharply".

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 jobs 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%.

USA Unemployment (Jobs!) The weekly Department of Labor unemployment claims are not indicating a robust or even major economic recovery, even though a lagging indicator. In the week ending July 10, the advance figure for seasonally adjusted initial claims was 429,000, a decrease of 29,000 from the previous week's revised figure of 458,000. The 4-week moving average was 455,250, a decrease of 11,750 from the previous week's revised average of 467,000. The release of the FOMC meeting minutes on July 14 included the Summary of Economic Projections by the 17 FOMC members. The USA 2010 Unemployment Rate projection is 9.2% to 9.5%.

The BLS June Employment Situation report was disappointing, but expected. The June unemployment rate (Table A-10. Selected unemployment indicators, seasonally adjusted) decreased to 9.5% in June from 9.7% in May and 9.9% in April. Total jobs, nonfarm payroll employment, decreased -125,000. The private sector generated only +83,000 jobs while the public sector decreased by -208,000 jobs as the census employment ended. In May the private sector created +41,000 jobs and 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 June U-6 unemployment rate (Table A-15, seasonally adjusted) was 16.5%, compared to 16.6% in May and 17.1% in April.

The Gallup Poll reported underemployment in June was 18.3%, a 2010 low. Previously this had been reported in May at 19.1%, compared to 18.9% in April. The Conference Board's Employment Trends Index increased in June for the 11th consecutive month and is now at 96.1. The Index is up +9.8% YoY, and "The moderate increase in the Employment Trends Index in the last two months suggests that many employers are now concerned that the recovery is losing momentum.". 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.

Consumer Sentiment The Thomson Reuters/University of Michigan's consumer sentiment index plummeted to 66.5 from 76.0 in June. That was below market expectations for 74.5. 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. The Conference Board Consumer Confidence Index which had been on the rise for three consecutive months, declined sharply in June. The Index now stands at 52.9 (1985=100), down from 62.7 in May.

World Economic Trends The IMF issued a June 30 partial update of the World Economic Outlook which is reviewed here. Overall the 2010 outlook for the world and many nations is better in 2010 than 2011 and better for the first-half of 2010 than the second-half of 2010. Therefore, a slowdown is projected for the second-half of 2010 and a further slowdown for 2011 compared to 2010.

The Asia-Pacific region is the strongest global economic area. 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 viability of the Spanish banking system, which would then lead to concern about their sovereign 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 July 16 at 1.29+, 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 later in 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 Some positive news has kept the crisis from being total gloom. The Euro Zone has reported mixed economic data. 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: 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 Euro Zone are Germany, France, Italy, and Spain. UK is not in the EU, of course.

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. Portugal has been downgraded to A1 by Moody's with a stable outlook. Spain has been downgraded by Fitch from AAA to AA. 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.

USA Financial Regulatory Reform Meanwhile, back in the USA, financial reform has arrived but consists mostly of more regulations, government agencies, and consumer protection. The cause of the financial system meltdown was not addressed. At least the uncertainty in the financials sector and by investors has decreased. The reform is a sham. At least the rules of the road, and then the related financial system impact can be determined. The USA 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. At some point an analysis will be posted.

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.

Of interest on July 13 is "Dagong Global Credit Rating Co., China’s first real attempt at a ratings agency, initiated coverage on the sovereign debt of 50 different countries". The USA is rated AA. Their initial ratings are:
US Debt Rating Downgraded (Sort Of) (Daily Reckoning)
U.S. Stripped of AAA Credit Rating...By China?! (Zero Hedge)

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 Goldman Sachs settled SEC fraud charges on July 15 for $550 million, a mere pittance for GS. Reportedly this is 6 days trading profits for Goldman Sachs. The charges against Goldman Sachs had already brought into question the fairness, validity, and viability of the USA financial system. The SEC settlement shows that the Wall Street Banksters are walking away almost free. 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 real 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 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 magnified 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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