15 Jun 2012 Uncertainty Continues
US equity markets are off their May lows by about 4.5% to 5% depending on the index while economic releases continue to show the economy slowing. These reports and news from Europe and Washington’s ambivalence over the approaching fiscal cliff all keep a pretty tight lid on short-term optimism.
This morning the government announced that industrial production in the US unexpectedly fell in May for the second time in three months as production at factories, mines and utilities declined by .01%. Manufacturing, which makes up about 75% of total production and a good part of the the US recovery so far, dropped 0.4% in May.
Business activity, as measured by the New York Fed slowed in that state, but is still growing, albeit not as fast as it was. The index came in at 2.29 for May, but slowed from a strong 17.09 in April. According to Econoday, slowing was focused on new orders, shipments, employment and a slip in businesses’ six-month outlook.
Inflation, as measured by the consumer price index went negative .03% in May on rapidly falling energy costs, while the core rate (excludes food and energy) remained unchanged and moderately high at 2.3% on a year-ago basis.
As the US dollar continues to benefit as a safe haven from Europe’s and some of the developing world’s woes, prices of imports remain subdued. The government reported that import and export prices fell a substantial 1.0% in May for the first decline since October, according to Econoday. Year-on-year import prices are down 0.3 percent for the first decline since October 2009. Excluding petroleum, import prices slipped 0.1 % with the year-on-year rate at only plus 0.3% which is the lowest since December 2009, according to Econoday. Also, export prices are fell 0.4% in May despite a 0.7% monthly rise in the prices of agricultural exports.
G7 leaders, meeting in Mexico, including those from U.K., Japan, and Canada ramped up their warnings that if Europe fails to get ahead of the growing debt contagion there, the world’s financial markets and economy could be threatened. This weekend, should Greek voters favor the Syriza party, led by Alexis Tsipras, has promised to abrogate the terms of the 240 billion-euro bailout from the European Commission, ECB, and IMF. Doing so clearly threaten Greece’s place n the union as well as potential spread of contagion to Spain and Italy. We will get an early read over the weekend and early next week, both what direction Greece will take and, hopefully, what European central bankers plan to do in response.
Finally, some some tough votes loom in the US as well, not nationally, but in Washington. On June 7th Fed Chairman Ben Bernanke clearly articulated that if the ‘fiscal cliff’ facing our country was not addressed by policymakers by the end of the year, the combination of the Bush tax cuts being allowed to expire as well as the trillion or so automatic spending cuts that go into effect in January 2013 because congress failed to adequately address budget control earlier, could easily propel the economy back into recession.
What is missing both at home and abroad is leadership; the kind of leadership that embodies the art of temporal compromise, or putting aside fundamental ideologies long enough to steer away from almost certain crises immediately ahead. We pray someone will take the wheel soon.