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As the clock ticks with little more than a week to go before the August 2 deadline, Democrats and Republicans say they are no closer to a deal to raise the debt limit and cut spending. The latest out is that Obama and House Speaker John Boehner may be close to a deal. Even though details are sketchy, Democrats are critical of it because spending would be immediate and tax increases would come only later, if at all. 

Last week’s Brief posed a question within a question. First, has the US economy hit a temporary slow patch or is a prolonged slowdown looming? The question within is general and aimed at the cause of the latest slowdown. Answers include; disruptions in Japanese supply lines caused initial slowing; a retreating European economy, driven by debt concerns, further reduces demand for American goods and services, and emerging markets such as China, Brazil, and India are slowing their demand for US exports as their central banks attempt to rein in skyrocketing inflation. 

Since the early days, the US economic recovery has depended significantly on manufacturing and exports to sustain its momentum until consumer spending and housing could begin pulling their weight. But disruptions in the supply chain from Japan, brought about by the tragic earthquakes and tsunami, have taken a greater than anticipated toll on manufacturing. Add the weight of Europe’s debt crisis and Asia’s monetary tightening and one might reasonably ask the question of whether sufficient momentum remains to get us over the hill? 

The US economy grew at 1.8% in the first quarter according to the Commerce Department’s second and unrevised estimate. Following their monthly meeting, the Federal Reserve said they still expected the economy to recover, but reduced their 2011 GDP growth estimates from 3.3% - 3.7% to 2.7% - 2.9%. They forecasted growth of 3.5% - 4.2% in 2013. Forward looking stock investors have taken the S&P 500 down 5.9% from its April 29th high, but the index remains up 3% for the year. Bonds on the other hand have done well as the economy slumps. The Barclay’s 7-10-year Treasury index is up 5.5%. 

Rising incomes and asset prices cover a lot of sins. For decades, consumers, businesses, and most notably our government, enabled by a steadily expanding standard of living, have adopted excess as an entitlement. The overwhelming impact of years of excessive spending and over-borrowing is becoming increasingly acute as none of the usual remedies is working. Wasteful government stimulus (with a few possible exceptions from T.A.R.P), Fed-controlled interest rates at near zero for years, and quantitative easings 1 & 2 (Fed buying US debt) have all fallen well short of their usual potency. We seem to have hit the wall; our excesses have finally caught up to us. 

George Bernard Shaw once said “if all economists were laid end to end, they would not reach a conclusion.” Someone later added that laying them end to end would not necessarily be a bad thing. At any rate, Bloomberg news reports that 67 of them recently polled, called for economic growth to resume in the second half of this year. The median estimate is for 3.2% growth following a disappointing 2.3% this latest quarter. They say that “rising exports, stable fuel prices, record levels of cash in company coffers and easier lending rules will be enough to overcome the damage done by one-time events like poor weather and the disaster in Japan.” They also expect that the Fed will wait even longer to raise interest rates next year.

A basic tenant in negotiating is to start with an extreme position from which you allow your opponent to gain ground against, but only to a point that is better than or at your original objective. Have we as a ‘civilization’ gotten so accomplished to negotiating/posturing our own objectives that we completely lose sight of the greater good? You name the arena and it seems that leaders on both or more sides are so entrenched in their own beliefs and positions that no middle ground exists. Seemingly unsolvable conflicts abound, in the NFL, state houses, Washington, Pakistan v. India, Pakistan v. US, even Israel v. the US: The sense of urgency or the bigger picture are held hostage by ideology or greed. It’s the story of mankind, but it just seems louder and more prevalent lately. 

There were a few bright spots in an otherwise gloomy week for economic data. New home sales in April jumped over 7% and drew down new-home supply to 6.5 months. Corporate profits were up an annualized 25.6% for the first quarter. And personal income rose 0.5% in March as wages and salaries rose a modest 0.3%. But, from there the news was less encouraging. The government’s second estimate of economic growth for first quarter GDP was no higher than it’s initial estimate of only 1.8% annualized. Initial jobless claims rose 10,000 last week to a 424,000 level. And on the manufacturing front, damage from interrupted Japanese supply lines began to show in the numbers. 

If you’ve invested long enough, it’s almost certain that you’ve been made to feel less than knowledgeable, either by your advisor (unwittingly, of course) or by ‘Mr. Market.’ People invest for as many reasons as there are people. Today’s Brief addresses the purpose of the vast majority of investors; that of saving to replace the paycheck. Some call it retirement, some call it freedom from salary, others refer to it as their second half, and still others call it doing what you really want to do, or were meant to do all along. Whatever you call it, it happens when you begin depending on your investments to see you through life, no longer relying on what is commonly referred to as ‘your day job.’ 

Prices are rising where we notice them the most; the grocery store and the gas pump, so it feels like inflation is rearing its ugly head again.  On an unadjusted annual basis, headline inflation was up 3.2% in April while the core (excludes food and energy) was up 1.3%. A headline rate of 3.2% is not unusual for recent history. It peaked once in 2008, reaching 3.8%, but has not sustained highs much above 3% since the 70’s and late 80’s.