Europe and America at the Crossroads 9 comments
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It has taken a year for the US economy to stop falling. In June and July, the Institute for Supply Management [ISM] Manufacturing Index registered its first two months at or above 50 since January. This was the first reversal of the declining trend which had held since June of last year. The ISM Services Index, which never dropped as far as Manufacturing, fell below 50 for the first time this year in June and will likely recover in July. The Chicago Purchasing Managers Index which has been below 50 since February, and falling for over a year, poked back above 50 in July. Non Farm Payrolls, the focus of so much consternation, has been steady at -50,000 for three months now.
And the two statistics which have fallen the farthest, the University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Survey both moved higher in July, albeit by very small amounts. Lastly, GDP has recovered to a stimulus enhanced +1.9% in the second quarter after a negative fourth quarter last year and anemic first quarter this year.
One should be careful not to ascribe the attributes of a recovery to the merest indication of stabilization, to paraphrase a British statesman. But this mere indication has been enough to improve the dollar almost three percent against the euro.
There is in fact no recovery in sight for the US economy. There is only a great deal of speculation about the pending effect of the Fed rate cuts on the consumer economy and the effect of liquidity measures to fortify the banking system. The housing market has not stopped falling. The declines in existing home sales have diminished, settling near -2% per month since January. The number of months supply of unsold new homes on the market also decreased for the first time since April of last year.
The US economy is mired in an unusual economic cycle. Americans are restrained by the housing losses and debilitating oil prices are crimping consumer spending, the single biggest contributor to GDP growth. But exports are booming due to a weak dollar and benefit from still strong (comparatively) growth in other parts of the world. But the export sector is vulnerable to any overseas economic slowdown.
Have the Fed rate cuts simply prevented the bottom from falling out of the US economy or has the positive effect of Fed boosterism been delayed because of the housing and financial problems and the economic drag from the price of oil?
European statistics have turned drastically down in the past few months. European Monetary Union [EMU] Economic Sentiment figures for business and consumers are at multi-year lows. The Purchasing Managers Index for Manufacturing and for Services have both been below 50 for two months now. Retail Sales, Industrial Production and New Orders are weak. The ECB continues to hold the rate sword aloft threatening further hikes.
For the dollar and the euro what happens next in the EMU is, for the moment, more pertinent than events in the US. Provided, that is, the US remains stable. Except for inflation, consumer sentiment and GDP, major US statistics have not changed appreciably for six months. If the US remains quiescent then the decision on the immediate fate of the dollar will depend on how far EMU growth falters. If second quarter EMU GDP is negative, the dollar will strengthen.
If the US is only delayed in recovery due to the housing crisis and energy prices then it is ahead of the EMU in the business cycle and will recover first. The housing fall will not last forever. There is however the danger of another oil price spike. There is no assurance that crude oil has seen its high. A further nuclear development in Iran or an Israeli threat could send the price of oil skyrocketing again. The decline in prices that began with President Bush's call for US oil drilling was largely predicated on the idea that Congress would be forced to lift its own ban on US energy production. If that does not come to pass, or is much delayed, the benefit in lower oil prices from the promise of greater supply will wear off and prices will begin to rise again.
Rising oil prices are the greatest threat to the American economy. Consumers are stretched, jobs are fragile and if oil returns to $140 and higher it is hard to see how the US can retain positive economic growth.
Will the EMU slow enough for currency traders to force a break through the bottom of the range, at 1.5350, that has held firm since March? Will the US Congress permit American energy development and a US economic recovery or will they drive the economy into recession? The answer to the first question is only partially amenable to human intervention; the second is at the mercy of human foolishness.
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This article has 9 comments:
Now that outcome is very clear-but first of all investors need to acknowledge lag.
The point is ,that our problems have been identified and are being addressed by the FED ,the Congress and the Administration.
Surely ,some additional easing would be helpfull but that may be acknowledged in the period ahead .
The ECB and the Europe are the real economic trap,as I have stated since last year.
ECB continues to maintain high rate policy as the economic deceleration in Europe is not only a certainty but a catalyst leading to a a mjor implosion in the period ahead (emerging market economies are heading for more severe implosion).
No doubt in my mind that European economy will be derailed and sequentially Asia and Latin America economies will follow.
This will create a massive inflows into U.S adding fuel to recovery ahead .Record demand for dollar assets will follow helping the housing industry and the stock market.
Sounds incredible?Then again when I had predicted today's events in June of 2005 and had reiterated them in on September 18 /2007 (Bloomberg TV,BrianSullivan).not too many economists/investors accepted my prognosis.I will be right on my current outlook as well.Patience is the word.
It is the height of arrogance for 553 people to assume they are more enlightened than the collective conscious of the 300+ million markets participants. This level of power is absolutely corrupting. It breeds cronyism and makes multi, multi-millionaires out of all of them.
The power to create money out of nothing is concentrated in the hands of 12 human beings. They disseminate this counterfeit crap thru their cartel of banks creating systemic risk to the natural order of the free-markets.
These banks leverage themselves to the moon knowing that the more leverage they use, the more peril they place the rest of the market at, thus guaranteeing a taxpayer bailout once the counterfeit game has worked its way thru the system. They know the inevitable outcome. It's a matter of looting it as much as they can by leveraging themselves to such an obscene multiple that makes them, "too big to fail."
With each round of "free-money," the destruction multiplies and yet more and more power is grabbed by the very thieves that created the mess.
The counterfeiting powers of the federal reserve and its fractional reserve mechanism of leveraging its counterfeit is the single biggest threat we face. It has been incrementally robbing people of their living standards since its beginning.
Not being able to afford a new SUV every few years, a couple of packs of cigarettes and a faceful of pizza every day would not be an economic tragedy.
There are other ways of looking at the economy that go beyond the models used by the statisticians at the ISM and the University of Michigan Consumer Sentiment Index.
It might be that we have entered a "post" economic era without even noticing it.
For example, we are watching the death of millions of animal species, global warming and the end of our oil based economies, to name only three immense disasters.
And we Americans are eating, drinking and fornicating ourselves into physical and spiritual oblivion.
Consumer confidence indeed!