Current economic conditions, in general, a still appear to be weakening, but at a slower pace. Some analysts are attempting to put a positive spin on the situation by saying that a “slower rate of down is now the new up.”  It appears that the simulative efforts undertaken by the Federal Reserve and the Treasury may cause the downturn in the economy to be of a shorter duration than it normally would have been. In fact, there recently has been some evidence that there is light at the end of the tunnel for the economy. One of the better examples of this is the most recent U.S. employment report. April nonfarm payrolls were only down 539,000, against a guess of a 600,000 decline and manufacturing payrolls declined by 149,000, which compares to the median estimate of a 155,000 drop. Some of this optimism faded later when a Bloomberg poll showed that economists expect unemployment to exceed 8% through 2011. The poll said unemployment will average 8.5% in 2011 after hitting the 9.6% level in 2010, which is higher than previously anticipated. In spite of this, North American employment numbers recently have been “less bad,” according to many analysts and media commentators. As weak as the recent employment reports have been, it is necessary to remember that employment statistics are considered to be a lagging indicator rather than a leading indicator of future economic activity.


                                                                    Retail Sales

Rising unemployment numbers are continuing to adversely affect the retail industry. According to the Commerce Department, April advance retail sales unexpectedly fell .4% for the second month.  The median guess for this report was unchanged. Retail sales, excluding autos were down .5%, which compares to the estimate of up .2%.
 
                                                                 
                                                                       Housing

There is a mixed to bearish picture for the U.S. housing industry. March new home sales were better than anticipated at 356,000, which compares to a median guess of 337,000. Partially offsetting this improvement was news that home prices in the U.S. dropped the most on record in the first quarter. According to the National Association of Realtors the median home price fell 14% to $169,000.  Much of this appears to be due to foreclosed properties that were sold by banks. Even though U.S. banks have received billions of dollars from the government, financial institutions are actually making fewer loans and have been accused of hoarding cash. In fact, many U.S. banks have actually made it more difficult for potential home buyers to receive mortgage approvals in the last six months. More restrictive lending rules and home price declines will probably keep many buyers out of the housing market, at least for now.


                                                         Gross Domestic Product

The U.S. GDP has not shown any signs of improvement yet. The first quarter U.S. annualized GDP was down 6.1%, which was much weaker than the median estimate of a 4.7% decline. A substantial portion of the surprise contraction in the nation’s output can be attributed to substantial declines in business inventories and exports. The business inventories portion of the report collapsed by almost 38%, while exports fell 30%. This drop in exports was the largest since 1969. The consumer spending portion of the report was encouraging, when it showed an increase of 2.2%, which compared to a median estimate of a .9% advance.


                                    Credit Card Companies - Lenders of Last Resort

Another area of concern is the increasing rate of credit card defaults. Since many “at risk” consumers are using their credit cards as a “lender of last resort” source of funding, it is feared that major credit card companies will soon announce increases in defaults and delinquencies. There is plenty of talk that consumer borrower defaults, due to an environment of rising unemployment, will be an added strain on the financial system. This fear is currently being addressed by banks and credit card companies through their efforts to limit lines of credit and cancel credit outright. Consumers continue to have a difficult time getting new credit lines and loans and it appears unlikely that this condition will be remedied anytime soon in spite of the variety of government assistance plans. Consumer spending could deteriorate even more as the problems on Wall Street move through the economy. Underscoring this problem is a report from the Federal Reserve that said a majority of U.S. banks have made it more difficult for consumers and businesses to get credit even though financial institutions received large injections of taxpayer funds. A Federal Reserve study showed that approximately 70% of U.S. banks have tightened their lending standards for small businesses. Our analysis suggests that there will be additional banking industry related problems in the U.S. to be revealed later this year.


                                                          Corporate Earnings

Our research has been telling us that corporate earnings would continue to deteriorate at least through the first half of this year. What our research did not tell us was that corporate analysts would lower their earnings expectations so much that very poor earnings numbers could actually appear bullish when compared to the very weak analyst’s estimates. Because of this, subpar earnings numbers appear to be a bit more palatable.


                                          Third Quarter Bottom for the Economy?

So far, the myriad of global economic stimulus packages and bailout plans have not been able to offset the destruction of wealth that has taken place as a result of the subprime mortgage related write downs. Even though the Federal Open Market Committee lowered interest rates by 75 to 100 basis points to a range of zero percent to 25 basis points at their December 16, 2008 meeting, followed by a $300 billion quantitative easing program, it appears to not have been enough to quickly revive the U.S. economy. We do not agree that the recent “less bad” economic reports are anything to get excited about, at least for now.  Currently we are seeing signs that the current period of economic weakness will continue through the summer months, but will stabilize later this year and show improvement starting in the first quarter of next year. More specifically, our research tells that the target period for a low in this recession is the third quarter, which is when the expansionary impact of all the world’s interest rate cuts and stimulus packages will begin to show positive results.

If you would like more information about this article, please contact Alan at 1.800.243.2649 or email him at alan.bush@archerfinancials.com .


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