Most Likely Scenario Is Still Recovery 9 comments
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The decline in the stock market in recent weeks, which was mainly driven by some not-so-encouraging news on the economic front, is giving pessimists some ammunition. There are certainly some risks, and in particular I am worried about long term interest rates and exchange rate movements, but the most likely scenario is still a recovery within this year. While the economy could indeed weaken further if long term interest rates continue to rise and if the US dollar keeps rising, a depression-like scenario is not in sight.
Many observers drew the conclusion from the weak June employment figures that the economy is going to collapse again. But the one-month weakening of the employment statistics is not a big cause for concern. As I remarked earlier, the disappointment should be put in context. We had well over 600,000 job losses as recently as April, and we only had 467,000 job losses. And in June, we had GM (GMGMQ.PK) going into chapter 11 and the closing of so many dealerships.
The latest retails sales figures were disappointing too, and that was a concern. But factory orders were rising, and ISM statistics were rising. US factory orders were clearly benefiting from rising exports and a weakened dollar.
This is exactly the recipe we need to correct global imbalances: we need to run trade surpluses to pay for what Americans owe the rest of the world! My worry is that the movement of the US dollar has been perverse: the dollar surges whenever the US economy weakens. That would weaken the US economy more!
Overseas, Japan is also hurting from a strong yen—something I had already commented on multiple times. The machinery tool orders in June were rising fast, at 25.5% from the previous month, but actually down 73.1% from the last year. Japan’s demise is not so much because fiscal stimulation would not work, even though for Japan as an extremely import-dependent economy fiscal stimulation indeed would not work nearly as well as it does for the US.
Any country in Japan’s shoes—trade-dependent and facing a surging currency—would fall into recession indefinitely. Again, the movement of the Yen tends to be perverse. It gains strength when the Japanese economy weakens.
The ECB, whose key rate at 1%, has refused to cut interest rates further, despite a need to boost consumption and domestic investment. Europe has always had a current account surplus. Its problem is not so much a strong Euro but weak consumption. The US cannot afford to consume more, but Europe can.
The ECB had maintained a hawkish stance against inflation and raised interest rates as late as July 9 2008. Even today Europe still has the highest interest rates among the Group of Seven nations.
The US manufacturing PMI rose to 44.8 in June, which is quite positive for the macroeconomy. Commenting on it, the Institute of Supply Management says in its website:
The PMI indicates growth for the second consecutive month in the overall economy, and continuing contraction in the manufacturing sector.
The average PMI for January through June (39.2 percent) corresponds to a 0.6 percent decrease in real gross domestic product (GDP). However, if the PMI for June (44.8 percent) is annualized, it corresponds to a 1.1 percent increase in real GDP annually.”
Commenting on the non-manufacturing PMI in June of 47.0, the ISM says,
Orders and requests for services and other non-manufacturing activities to be provided outside of the United States by domestically-based personnel grew in June for the first time since September 2008. The New Export Orders Index for June registered 54.5 percent. This is an increase of 7.5 percentage points from May's index of 47 percent.
Globally, there is no shortage of good news. Canada’s ISM or PMI index shot up to 58.2 from 48.4. Housing starts in June stood at 140700 against an expectation for 130000. Australia had a loss of 21,400 jobs, against an expectation for 25,000 job losses. Germany saw May industrial production surging by 3.7%. China’s PMI at 53.2 in June was not much different from 53.1 in May, but still represents the fourth month of consecutive gains, and domestic consumption and investment were surging.
In Hong Kong, total employment increased by around 12800 in the March-to-May period from the 3 months ending in April.
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This article has 9 comments:
If we lose 6 million jobs and then let's say in 2010 we create 1 million legit non government, non waste, permanent private sector jobs... aren't we still down 5 million? It isn't just even about this current recession, people are talking about a new normal.
Let's say the numbers do go positive, even the most optimistic people think they will be flat for at least a few years. The stock market is it's own beast but is an economy moving sideways ( after falling way down) really something to look forward to? What if we do have a jobless recovery followed by a "double dip" recession? What numbers should we believe?
It's great to be the hero who calls the bottom, but I believe even when we are officially out of the mess, there will still be pain.
Investopedia explains Aggregate Demand
Aggregate demand is the demand for the gross domestic product (GDP) of a country, and is represented by this formula:
Aggregate Demand (AD) = C + I + G (X-M) C = Consumers' expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.
On Jul 09 10:51 AM Larry House wrote:
> Why does someone who sees problems in the economy have to be a pessimist?
> I am an optimistic person, but when I see what I think are problems,
> they don't just go away because I am an optimistic person. I hope
> you are right in your rosy outlook. I don't short stocks; I don;t
> buy distressed debt; I want things to pick up. I have four grandkids
> that I hope live better than I do. However, I guess there had to
> be a "however," I see a consumer on his heals who is spending less
> and saving more; I see credit hard to get; I see 10% unemployment;
> I see massive government debt; I see a weakening dollar, and I think
> those things will prevent a robust economic rebound for many months
> to come. So that affects my investing outlook. I am underweight
> stocks (right now) and overweight bonds. I am not sitting in all
> cash or hiding in a cave or only investing in gold. I don't think
> my view makes me a pessimist, but I don't think things are just fine
> or as good as your cherry picking data would suggest. Can't we all
> just get along!!
This economy turns around IF and WHEN basic economic principles are followed, such as not spending more than one takes in. It is *impossible* to have a return to sustainable growth while attempting to contradict fundamentally incontrovertible principles.
are you and cetin working together? Why you spamming the same article everywhere that tells us nothing new
On Jul 09 11:42 AM Lok Sang Ho wrote:
> My forecast for the US economy is not "rosy": I see recovery soon
> but not strong recovery; I also see unemployment possibly peaking
> around 10%; I see more need for assistance to the states; I see piles
> of debt as you do. However, I see a weak dollar and a higher US savings
> rate to be part of the solution. Americans need to tighten their
> belts and pay for their overspending in the past. Americans need
> to work harder for LESS(less consumption). More Americans have to
> work. But we have seen higher debt to GDP ratios before. When the
> economy recovers, the debt to GDP ratio will fall, and the current
> debt levels does not spell the end of the world.