No Help for Bush or for Kerry

The U.S. Economy grew at a 2.8% annual rate in the second Quarter as higher oil prices dampened consumer demand and as imports of record amounts of foreign goods created a record trade deficit.  Corporate profits after taxes, reported for the first time today, rose 17.9% in the 12 months ended in June.  Business investment in equipment and software was revised up to the strongest pace since the third quarter last year.  Consumer spending was revised upward in this report from last month’s preliminary number of 1% to 1.6%.  

The GDP report today, while modestly better than expected, doesn’t change much in terms of market thinking.  Roger Kubarych, a former Federal Reserve economist, says the number “isn’t going the move the Fed from its current path of ‘measured’ interest rate increases, and it isn’t weak enough to help Kerry, who hasn’t been gaining much traction on the economic issue anyway.”

The largest force moving the market remains the price of oil whipsawed by the latest supply concerns and trading momentum.  Lately that momentum is mostly down and traders think it will continue for a while.  For the past five days oil has dropped since it failed to reach the $50.00 per barrel benchmark.  According to a Bloomberg News survey of 39 traders, 49% think oil will drop next week while 44% say it will rise.  That’s compared to only 24% of traders thinking oil would drop a week earlier.

Concern about continued attacks onIraq’s production facilities and a tax dispute between Russia and OAO Yukos Oil Co., the country’s largest oil exporter, served to push oil to a record $49.40 on August 20.  Since thenIraqhas increased exports and Yukos said its production will increase 6% a year.  Traders are now saying that a risk premium of $12 to $15 isn’t justified, suggesting prices could fall to the low 40’s or mid 30’s.

Finally, home sales, which could not indefinitely maintain their lofty levels began falling back to earth.  Existing home sales fell in July for the first time in seven months by 2.9%, from the record set in June as mortgage rates continued to rise to an average of 6.29%.  Rates averaged 5.91% in April.  It is thought that home closings were compressed into the last couple of months as buyers anticipated rates rising and moved more quickly than usual to lock in lower rates.

I believe the market is moving into an acceptance of slower economic growth, lower inflation concerns, and a prolonged period of relatively low interest rates.  With the price of oil likely dropping to the 30’s in the coming weeks the global economies will have few hindrances.  Here at home the question remains how effective will our economy be at creating new jobs?  The productivity gains of the last few quarters will likely slow somewhat meaning that businesses will no longer be able to increase goods production at previous rates without hiring more workers.  Likely hiring becomes even more robust if the oil drag is removed and the economy returns to 3.5 to 4% growth in GDP.  Stay tuned.