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by Don Azarias
July 16, 2010
Although so much optimism is being floated around by both, economists and analysts, with regard to an economic recovery, I had always remained cautious and non-committal in making my own prouncement that the U.S. economy is finally out of the doldrums. I’m more inclined to follow the cautious approach of those economists who are members of the National Bureau of Economic Research (NBER). With regard to the current economic condition, I’m of the opinion that the signals coming from various economic indicators are still not pointing towards an economic turnaround.
A dramatic drop in consumer confidence sent stocks and interest rates plunging late last month and left a key index at its lowest level of the year. It’s an indication that the economic recovery is stalling. The consuming public is in no mood to open its wallet to stimulate economic growth by buying those goods, merchandise and services produced and built by businesses to satisfy increasing demand as the economy improves. Now those business establishments are in a dire predicament asking themselves: Who’s going to buy all the cars, dishwashers, refrigerators and clothes heading to stores and showrooms? Businesses from automakers to appliance manufacturers have been slowly replenishing their inventories since late last year, helping the economy to expand.
And it’s really troubling when forecasters expect U.S. auto sales to decline for June after growing every month since January. Majority of the people surveyed do not plan to make many major purchases, from homes and autos to refrigerators, over the next six months. The Dow Jones Industrial Average (DJIA) fell about 270 points in afternoon trading to drop below 10,000 for the first time since June 10. The Dow and other major indexes each lost more than 2 percent. Stocks began the day by following Asian and European markets lower. Asian markets fell after an index that forecasts economic activity for China was revised lower. And then European indexes fell sharply after Greek workers walked off the job to protest steep budget cuts. Those Greeks are not really getting it, are they? Then, shortly after U.S. trading began, the market was hit with news that consumer confidence fell sharply this month because of worries about jobs and the overall economy.
Only about 230 stocks rose while about 2,790 stocks fell at the New York Stock Exchange. Crude oil fell $2.45 to $75.80 per barrel on the New York Mercantile Exchange. The Chicago Board Options Exchange’s Volatility Index (VIX) rose 18.9 percent. For the readers’ information, the VIX is known as the market’s “fear gauge” because a rise signals traders are expecting more drops in stocks. Industrial stocks suffered some of the steepest drops on fears that a stalled global rebound will cut demand. Aircraft maker Boeing Co. led the Dow lower with a drop of 5.5 percent. Caterpillar Inc.,
the maker of construction and mining equipment, lost 4.9 percent. Shares of coal producers pulled energy stocks lower on worries about a slowdown.
Interest rates fell in the bond market after investors sought the safety of Treasurys. The yield on the 10-year note dropped to as low as 2.97 percent, the first time it has fallen below 3 percent since April 2009. The yield, which is used as a benchmark for many consumer loans and mortgages, bounced off its low to 2.98 percent but was still down from 3.03 percent. Falling yields are a sign that investors are willing to give up potential gains in stocks for more certain, but smaller profits in bonds.
Although the government reported that home prices rose in April, it still didn’t help the market. The S&P/Case-Shiller home price index rose 0.8 percent between March and April. The gains, though, became negligible because April was the final month when buyers could receive a tax credit. Nearly all housing indicators got a boost from the credit, but have since started a slowdown. The darker scenario is that government budget cuts, the end of fiscal stimulus, problems in Europe and a slowdown in China could lead to a double-dip recession in the global economy.
While most economists still think the chances of a double-dip recession are relatively low, concern is growing. Europe’s debt crisis has impacted Wall Street, resulting in lower valuations of investors’ stock portfolios. And unemployment is still stuck at nearly 10 percent. Unlike other recoveries, this one hasn’t been powered by consumer spending. Instead, it has been mostly supported by businesses restocking inventories that dwindled during the recession, and by spending overseas and by the government. Some companies, large and small, have indicated that business is getting better, yet there are few signs they are ready to hire in big numbers. Initial claims for unemployment benefits rose for the second time in three weeks last week. The potential rise in layoffs comes as Congress remains stuck at an impasse over extending federal jobless aid. The Labor Department said that new claims for jobless benefits jumped by 13,000 to a seasonally adjusted 472,000. The four-week average rose by 3,250 to 466,500, its highest level since March. Claims hover above 450,000 since the beginning of the year. That has heightened concerns among economists that jobs remain scarce even as the economy has begun to recover from the worst recession since the 1930s. Greater layoffs by construction firms and summer layoffs in many school districts also fueled the increase in unemployment benefit claims. The total number of people continuing to claim benefits rose by 43,000 to 4.6 million, the department said. But the number of people collecting extended benefits fell by 376,000, as Republican lawmakers have, for the right reason, refused to continue the extra aid. About 4.9 million people continue to collect emergency aid.
During the recession, Congress added up to 73 weeks of extra benefits on top of the 26 weeks typically provided by states. Congressional lawmakers are seeking to renew the extended benefits and continue them through November. But Republicans, for the right reasons, have objected, citing deficit concerns. They want the $34 billion cost of the bill to be paid for with funds remaining from last year’s stimulus package. And I believe that this is the right thing to do. Democrats, for the wrong reason, argue that it is emergency spending and should be added to the deficit. For the third time in as many weeks, Senate Republicans blocked a bill that would have continued unemployment checks to people who have been laid off for long stretches. Republicans, capitalizing on voter anger about the growing national debt, were firm in their opposition emphasizing that they would only support extending the benefits if the bill was paid for. They said the stimulus package contained plenty of pork for lawmakers’ pet projects that could be cut to cover the unemployment benefits instead.
“The two things that are growing fastest in this Democrat economy are the size of the federal government and the crushing burden of the national debt,” said Senate Republican leader Mitch McConnell of Kentucky, who led opposition to the extension. For the readers’ information, even Treasury Secretary Ben Bernanke believes that the federal deficit is on an unsustainable path. And this, coming from a brilliant economist and a scholar, should scare the pants off Obama and his fellow Democrats. The recession eliminated 7.9 million jobs. Many economists believe that they are lost forever.
The latest government jobs report shows that businesses have slowed their pace of hiring to a relative trickle. One of the big problems is that many of those workers who lost their jobs were in industries that are not likely to recover their former strength. It would take the creation of 10.6 million jobs immediately for the same percentage of the population to be working as was the case three years ago. Of course, it will take time to create jobs.
If it takes three years, more than 3.5 million additional jobs will be needed because of continued population growth. The unemployment rate is currently 9.5 percent. A return to the 4.4 percent rate it was the summer before the recession started in 2007 is out of reach. However, the Federal Reserve had just recently predicted that unemployment will stay around 7 percent or above through 2012, and in the 5 percent to 5.3 percent range in the long-run. It’s quite a rosy economic forecast. That’s the reason why I like Chairman Ben Bernanke and the Federal Reserve at times; they are the “eternal optimists.”