25 Feb 2011 Probably Just a Pothole
Mounting problems in Libya sent oil prices over $100, natural gas trading to record highs, and equity prices reeling. The MSCI US Broad Market Index, which represents 99.5% or more of the total market capitalization of all US common stocks was down 3.9% intra-day, but closed down 2.9% for the week as of yesterday. Realization that there is enough oil supply, a number of good earnings reports and today’s news that last year’s economy (despite a downward revision) still grew the best in 5 years has stocks up .6% this morning.
The Wall Street Journal reports that as much as 75% of Libya’s oil production may have stopped as rebel forces clash with the country’s leader. Crude futures retreated from two-year highs as Saudi Arabia, the US, and the International Energy Agency asserted that global supplies remain adequate, even without Libya’s production. Yesterday, the IEA said it estimates the Libyan crisis has removed less than 1% of global production from the market saying further that “both consumers and producers have tools at hand to deliver adequate oil to the market.” Saudi officials also said the country could provide Libya’s customers with similar high-quality oil. The front-month April contract on the New York Mercantile Exchange was trading 59 cents up at $97.87 a barrel, down from above $103 a barrel at one point Thursday.
The US economy grew at 2.8% for all of 2010 according to the Commerce Department, slower than previously estimated, but still the fastest in five years. The economy shrank 2.6% in 2009 following the country’s second worst financial confidence meltdown. The government revised downward its fourth quarter estimate for growth of the US GDP from 3.2% to 2.8% annualized. The agency cited deeper cuts in state and local government spending and an upward revision to imports as the primary reasons. On the positive side, personal consumption expenditures were increased from 2.45 to 4.1% and non-residential fixed investment gained 5.3% in the latest period. Economists are increasingly of the opinion that the recovery is self-sustaining and the consumer will play an increasing role in the recovery.
Consumer confidence continued to rise in February. The Conference Board reported its index rose to 70.4 in February, the best in three years. Their assessment of job availability also improved. Fewer consumers in February said jobs are hard to get, at 45.7% vs. January’s 47.0%. Only 15.4% see jobs six month harder to get vs. January’s 21.2%.
President Obama told his 23-member President’s Council on Jobs and Competitiveness yesterday that “the biggest challenge that we’re seeing right now is that unemployment is way too high.” According to the WSJ, Obama told the group that he wants them to provide “some concrete deliverables” that will help lower the 9% unemployment rate. GE CEO Jeff Inmelt, who heads the President’s panel, said he wants the group to put a “laser-like focus” on jobs, including the impact of education and immigration policy, global trade, research and development, and energy. Inmelt acknowledged private sector responsibility saying “we know that the private sector has to lead the way.”
The government’s weekly jobless claims data report showed hopeful improvement. Initial claims for the week of February 19th fell 22,000 to 391,000. The four-week average confirms the improvement, falling a sizable 16,500 to 402,000 for a nearly 30,000 decline from the month-ago level as reported by Bloomberg. “A break below 400,000 in future weeks would begin to raise expectations for sizable payroll gains and extending declines for the unemployment rate.”
The other drag on the economy, housing, showed modest improvement this week. Existing-Home sales unexpectedly rose last month by 2.7%, though at prices near nine-year lows, according to the National Association of Realtors. They said the inventory of previously owned homes listed for sale contracted 5.1% at the end of January to 3.38 million homes available for sale. That represented a 7.6-month supply at the current sales pace, compared with a revised 8.2-month supply the previous month. Lawrence Yun of the NAR said he expects inventories to climb back up to between eight or nine months’ worth of supply by the summer.
Prices are the critical component as no one knows how much supply there really is or will be out there in the coming year ahead. Mr. Yun refers to the “shadow inventory” of unlisted bank-owned homes and potential foreclosures that will eventually hit the market, pushing out price-stability even further. Economists at Capital Economics estimate that for the current level of demand, there are 850,000 too many homes for sale. Robert Shiller, the Yale University economist who co-founded the index that bears his name, said Tuesday that there remains a “substantial risk” of another 15% or 20% decline in home prices. Most economists say another 5% decline is more likely and that the housing market should stabilize as economic growth accelerates. Perhaps the truth lies somewhere between.
The Obama administration wants to increase the scope of the corporate tax overhaul to include “re-visiting” long-standing rules that give businesses a choice of paying taxes as a corporation or on individual tax returns. The new legislation would affect income earned law firms, CPA firms, real estate brokers, investment partnerships and so-called S corporations. Geithner said “Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they’re treated as corporations for tax purposes or not,” Geithner told Senate Finance Committee members. Later in his testimony he said: “You have to look at business taxes outside the corporate sector if you’re going to do something sensible here.”
According to Bloomberg, of 32.1 million US businesses in 2007, 5.9 million opted to file under the corporate code, with total taxes paid of just under $1.4 trillion. About 7 million partnerships and S corporations earned $484 billion and $976 billion, respectively. The rest of the businesses were sole proprietorships that collectively earned $335 billion. In my humble opinion, additional uncertainty in the tax code does not exactly boost the Administration’s hopes of job growth unless it is done quickly and results in a much-simplified code. Miracles do happen, but the last one I can think of in Washington was in 1814 when a huge tornado forced the British back to their badly damaged ships before they could completely destroy the place.