27 Jul 2012 Surviving or Thriving?
The economy continued to slow in the second quarter, according to the Commerce Department. In fact the so called recovery is now officially the second slowest since WWII. Much of the economic data this week advanced the argument that the economy is slowing. Europe, China, and the developing world are only making matters worse as their economies face varying degrees of challenges.
This morning the government released its most complete appraisal of the US economy. Gross domestic product for the second quarter of this year slowed to an annual growth rate of 1.5%, compared to 2% rate in the first quarter and a 4.1% rate in the fourth quarter of 2011.
The chart above demonstrates an economy struggling to regain it’s footing after the massive blow of 2009. Sub-par growth of 2%, and now 1.5%, have simply proven insufficient to generate the kinds of job creation and capital investment necessary for a healthy recovery. Both pops of 4% in the 4th quarters of ‘09 and ’11 failed to provide enough momentum to escape the gravitational pull of uncertainty.
The Great Recession officially ended in the second quarter of 2009. Since then the economy has grown a total of 5.8%, revised downward from 6.2% in the same report. The revision means that this recovery is only slightly better than the slowest recovery in the last 60 years of 4.4%, which occurred during four quarters of 1980 and 1981.
The consumer remains absent, arguably a major cause of the weakness. Consumers represent close to three quarters of the US economy. Today’s GDP report showed that personal consumption expenditures rose only 1.5% during the second quarter, which is the smallest gain in a year and is down from a 2.4% increase in the first quarter. Spending on durable goods, items such as cars and home appliances meant to last at least three years, fell 1.0% in the second quarter.
Consumers reticence to purchase has been evidenced nowhere more clearly than in the housing market. A couple of good months’ good news in housing reversed this week. Sales of new homes fell sharply in June, but the news was softened somewhat because of exceptional upward revisions to April and May numbers. June’s annual sales rate was 350,compared to 382,000 in May, which was the highest rate in more than 2 years when government programs were stimulating sales, according to Econoday.
Also disappointing was that closings of existing homes fell by 1.4% in June with declines in 3 of 4 sectors of the country. The report cited the National Association of Realtors as saying that lack of supply was an increasing negative. There’s an unexpected twist.
Manufacturing news continued mixed this week, with no real trend indicated. The Chicago Fed’s national activity index came in at minus 0.15 in June vs. May’s revised minus 0.48. A reading below zero suggests that growth in national economic activity is below historical trend.
Regional Fed reports from Richmond and Kansas City only added to the confusion of where manufacturing is headed. The Kansas City survey showed improvement in July, though it remained sluggish. The composite index rose to 5 from 3 in June, indicating a marginally stronger growth rate. But the details were mixed according to Econoday.
Richmond’s manufacturing index fell to a minus 17 revealing a deep contraction vs. only fractional contraction in June. New orders, the best forward indicator, fell to minus 25 vs. June’s already very weak minus 7. Backlogs, at minus 27, are extending their run of deep contraction.
Euro area leaders say they are ready to support Spain as investors force higher its borrowing costs. Finance Minister Luc Frieden said no work is being done for a bailout of the Spanish government, but policy makers in the 17-country euro area must be prepared to move quickly. Markets surged yesterday as Mario Draghi, president of the European Central Bank said the bank “is ready to do whatever it takes to preserve the euro.” This was taken as a strong signal by investors that the ECB will resume its program of buying buy the bonds of struggling euro nations.
His assurances started a rally in Spanish and Italian bonds that continues to drive yields lower. But, yields still remain entirely too high to reasonably expect long-term sustainability of solvency. Many analysts have come to believe that Greece will leave the Euro, sparking a still-serious risk to the euro fabric.
Here in the US we have the continuing threat of the fiscal cliff in which tax rates rise and 1.3 trillion in government spending will stop abruptly. The unprecedented uncertainty caused by these looming events is having a profound effect on personal and corporate behavior, which so far has not played out to its fullest.
Depending upon the elections, investors may liquidate their largest capital gains in stocks, real estate, businesses, and other assets as rates are slated to rise from 15% to 28.8% (25% plus Obamacare’s 3.8% premium on investment). Families are passing down to the next generation millions of dollars of property and business interests under the threat that estate tax exemptions will fall from $5 million to $1 million. Will these assets be managed as well? We can only hope.
Uncertainty on taxation and regulation curbs corporate investment which only hurts long term sales and profitability. Bucking thetrend is Amazon’s Jeff Bezos who has opened six fulfillment centers and plans to add 12 more in 2012 to speed up online-purchase deliveries and bring down shipping costs. There would surely be more Amazon activity given all the corporate cash in treasuries were there more direction on tax and regulatory policies.
While shrinking Europe, and to an extent China, add some of the uncertainty with which investors must grapple, Washington and the policies it emotes represents the ‘mother’ of all uncertainties.’ Only when we choose our path in November; Socialism or Capitalism, will these massive uncertainties be addressed. Then we can get back to work, surviving or thriving.