What I expect for our economy
8-24-2009
Earnings season is over now and for the most part investors are getting in their last vacations of the summer. This ultimately means that a lack of news and low volume is to be expected.
With the major indices gaining sizably over the last month and reaching 2009 highs, there is a likely possibility of seeing a correction caused by the realization of market prices that are not supported by the assets that they represent. September is known to be one of the worst performing months for stocks, and logic leads us to believe that we are due for a downturn soon – will it come once again in September?
Germany, France and Japan are among the firsts to have reported positive Gross Domestic Product (GDP). Japan’s results were seen as mixed due to the uncertainty of further growth, while, the U.S. is likely to follow these countries in the Third Quarter with expected results ranging from .01% to 1% (Real GDP). The U.S. has seen the benefits from several monetary and fiscal stimulus efforts, among them being “Cash for Clunkers,” which should impact Third Quarter results substantially.
The Housing market is showing signs of stabilization and has quite likely hit bottom. Housing starts and permits have been on the rise over the last two months, and existing home sales have surged by approximately 7% - marking the largest month over month increase in ten years. Foreclosures are still high and may not get improve until unemployment is addressed which remains just under 10%.
Unemployment made a surprise dip last month to 9.4% from 9.5%; however, the expectation is generally that it will increase in the coming months. In July 247,000 jobs were lost, for a total of approximately 7 million since December 2007. The rate is likely to stay in this range for some time and should increase slightly in the near future. There is a chance for an extended recovery due to several factors one of which being the capacity utilization rate which is not indicating the need for additional labor and may dissuade hiring.
Mortgage rates are hovering around 5.5% and Ben Bernanke – Chairman of the Federal Reserve – reassured the market that they will maintain their Fed Rate between 0%-.25% for several months. The Federal Reserve also announced that they will be winding down programs aimed at making credit more affordable, and we should begin to see the mortgage rates increase in the fourth quarter and into 2010. The recovery of the Housing market relies on low mortgage rates which are the result of the demand for government issued bonds. There are several things to watch for, one of which is the rates – which if rise to quickly will hurt the recovery – and foreclosure rates. Additionally, as the U.S. deficit grows, foreign purchasers may begin to expect a higher risk premium as our deficit expands.
There are several weaknesses that still remain; Unemployment, Foreclosures, high savings rates, and dismal consumption. With all of the weaknesses, it is fair to say our economy is still in the midst of recovery and will be so for several months if not longer. Even after we have proven to be out of recession there are still major concerns surrounding our deficit that need to be addressed, such as the estimates that our deficit could reach 13% debt-GDP. This would be double the percentage we have seen excluding the years of WWII (which contributed over 30% debt-GDP). While Wall Street typically is a leading indicator of the general economy it may be safe to assume that moods are changing, however, there is clearly quite a ways to go and this can only emphasize the point that the market is getting ahead of itself.