Market Tests Looming

Next week’s economic reports may test investors’ resolve as closely-watched reports on retail sales, housing, jobs, manufacturing, and inflation are released. The most important is retail sales, which drives 70% of our economy. It is likely to show a second month of contraction, according to economists tracked by Bloomberg.

Personal spending was flat in April. Combine that with the BLS employment’s report that hours worked contracted 0.6% and weekly earnings 0.4% and you have a set up for disappointment. All indicators point to the possibility that the tax increases are having an impact, if not as quickly as earlier predicted.


Housing starts may also be in store for a correction after they jumped a huge 7% last month to a 1.04 million annual rate, the highest since June 2008. Building permits issued have been much slower in the past two months.


Initial jobless claims have reached a six-year low, but government and defense contractor layoffs will be coming soon. Last week the government reported that the economy added an unexpected 165,000 jobs, however, the large majority were concentrated in low-wage industries so the trend of income growth continues very slow. Indicators pointing to a continued economic slowdown in the second quarter of this year may keep a lid on job creation.

A recent Bloomberg article pointed out that staffing firm Robert Half Associates CEO Harold Messmer Jr. recently observed that “the percentage of temporary workers in the US labor force is nearing an all-time high and is expected to rise.” Temp hiring is one way for businesses to avoid the costs of benefits and unemployment insurance.

Inflation continues to slow and along with it the ability of companies to raise prices. The effects of declining oil and gas prices are making their way into the core measure of inflation and that has an increasing number of Fed officials concerned. Soft consumer demand makes it tough for companies to raise prices compounding the difficulties for them to meet profit expectations from investors.

Deficit doves will take delight in recent news that the US federal budget deficit is shrinking faster than expected because of increasing revenues from higher taxes, modest economic growth, fiscal cutbacks, and the winding down of military operations. The Congressional Budget Office now calculates the federal deficit through the first seven months of the fiscal year that began in October 2012 is $231 billion less than the deficit was at this time a year ago, as reported by the WSJ.

Unfortunately, the improvement is only temporary and may do more harm than good if it further emboldens those who believe government taxes and spending should be increased rather than looking constructively at cuts in spending, especially entitlements. Those on the other side will likely insist they have given enough ground on tax increases.

According to a recent Bloomberg Brief, “on May 19 the federal debt ceiling will no longer be suspended at $16.4 trillion and the U.S. Treasury will have to begin taking unorthodox steps to maintain a new debt ceiling that will probably be somewhere near $16.7 trillion after accounting for government borrowing during the past four months. This foreshadows what may be a larger crisis later this year if no deal is reached to raise the federal debt limit. As early as Oct. 1 the steps U.S. Treasury can take to avoid hitting the debt limit will be exhausted. If an agreement has not been reached, there is the risk of a government shutdown and possible default at the same time the U.S. government is due to agree on a budget for fiscal year 2014.”

Given the past three years of government by crisis resulting in continued impasse, it is a good sign that President Obama appears to be laying the groundwork to finding some agreement on top issues such as the budget deficit and immigration. His lobbying efforts with influential members of Congress continued yesterday on the golf course and in the White House dining room with Republican Senators Saxby  Saxby Chambliss of Georgia and Bob Corker of Tennessee, as well as Colorado Democrat Mark Udall. We don’t know if the outing resulted in any constructive developments, but we do know that Saxby Chambliss’ had a hole-in-one and that the Republican team had the low score.

The Federal Reserve is clearly pushing investors into stocks and will likely continue to do so for several more months. The old saying, ‘don’t fight the Fed’ is a worthy and time-tested axiom. But as always, we encourage you to measure the risk to your plan and take no more than is absolutely necessary to accomplish your goals. If you need help with either risk or goal-setting, please call us.

Have a great weekend chasing that hole-in-one, ace, suntan, lead sailboat, or whatever you pursue for relaxation.