Sunday, July 25, 2010

Economic & Market News: USA Economic Outlook "Unusually Uncertain" (Weekly Update)

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Ben Bernanke, Chairman of the Board of Governors, Federal Reserve System


Chairman Bernanke: USA Economic Outlook "Unusually Uncertain"

Overview Sentiment apparently continues "cautiously optimistic" perhaps leaning to "extremely cautious optimism" about the global recovery. It appears a second half 2010 slowdown is in progress for the world and the USA. In addition, Fed Chairman Ben Bernanke, in testimony to Congress on July 21, stated, "the economic outlook remains unusually uncertain". Asia-Pacific is the most robust economic region while there is still some uncertainty about Europe's sovereign debt, financial system, and economic recovery. USA leading economic indicators are signalling the recovery is slowing down, even stalling. However, during this current earnings season many CEOs and the outlooks, guidance of many USA corporations are very positive about future growth prospects. However, much of the growth is international and specifically in  the Asia-Pacific region. USA unemployment and underemployment remains high, bank lending continues to contract, housing starts have plunged, durable goods orders are down, and the 2010 USA GDP projections are being revised  downwards.

USA Quarterly Earnings Season Earnings season is now two weeks old. The first week did not go well overall. However, there were more upbeat reports this past week, the second week. Some corporations continue cost cutting to drive up profits . Demand is not there on top line revenue growth. However, there now have been enough top line revenue growth reports to create a more bullish sentiment. First quarter earnings were very encouraging, especially in the technology, financial, and industrial sectors but the second quarter needs to beat..

USA Leading Economic Indicators The latest Economic Cycle Research Institute Weekly Leading Index was unchanged at 120.6 for the week ended July 16, but the annualized growth rate has dropped to -10.5%, the lowest since May 15, 2009. Lakshman Achuthan of ECRI says no persistent downtrend and therefore no double dip recession yet. The Conference Board reported the Leading Economic Index declined in June -0.2% (preliminary) to 109.8, which was disappointing. Changes in previous months, as revised, were May +0.5% (revised), April -0.1%, March +1.4%, February +0.4%, January +0.6%.

USA GDP The consensus USA 2010 GDP estimates now appear to be about +2.8% to +3.5%. The White House economic advisers raised their estimate from +2.7% to 3.2%. Citigroup lowered their estimate from +3.2% to +2.8%. Peter Morici estimates +3.1% here. 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%. These FOMC projections are reviewed here. 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 a disappointing +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 17, the advance figure for seasonally adjusted initial claims was 464,000, a increase of 37,000 from the previous week's revised figure of 427,000. The 4-week moving average was 456,000, a increase of 1,250 from the previous week's revised average of 454,750. 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 mid-July at 18.3% which is no change from the end of June, 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 has been downtrending, 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 23 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 Committee of European Banking Supervisors (CEBS) released the EU bank stress tests results of the major European banks on July 23, to disclose the state of the EU financial system. 7 of the 91 banks tested failed. The Wall Street Journal report, "EU Banks Survive Stress Test, Only 7 Flunk 'Stress' Trial, Surpassing Expectations but Fueling Skepticism" is here.

EU Economy Some positive news has kept the crisis from being total gloom. The Euro Zone has reported mixed economic data, but there is some economic growth. 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. Hungary is now being reviewed by S&P and Moody's for downgrade. The downgrades continue. Ireland was downgraded by Moody's Aa2 with stable outlook. 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 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 on this 2,000+ page reform bill.

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 rise of the machines - algorithms are taking over the market. 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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