Too Many Economic Uncertainties Remain In Place

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Includes: DIA, QQQ, SPY
by: Sy Harding

Consumers, businesses, and stock markets hate uncertainty, and they sure have been subjected to more of it than they can handle so far this year. As a result, consumer and business confidence is at very low readings, and stock markets around the world are in serious corrections, many down more than the 20% that marks their entry into bear markets.

Among the uncertainties, economists are split about 50-50 on whether the U.S. economic slowdown is entering a recession, or is about to begin recovering. Even the optimists, including the Federal Reserve, warn that it may depend on how Europe handles its debt crisis. The story goes that if Greece defaults on its debt it would have such a devastating effect on the European financial system that an economic recession in Europe would be unavoidable, and would spread globally.

Against that backdrop, reports show economic growth in Europe continues to deteriorate, along with consumer and business confidence.

However, hopes were raised last week by reports that the Bank of England, the British equivalent of the U.S. Federal Reserve, will inject a second round of quantitative easing into Britain’s faltering economy, and reports that eurozone officials are considering ways the EU and IMF might be able to recapitalize European banks so they could better withstand a default by Greece or other eurozone countries.

But critics noted that previous such assurances subsequently ran into problems in getting the agreement of individual EU countries that would have to support the plan. And sure enough, on Friday, German Chancellor Angela Merkel said Europe’s banks should have to try to raise additional capital from investors first, and only if they fail to do so should eurozone governments be expected to take action.

And on Tuesday, Moody’s rating agency downgraded Italy’s credit rating by three notches, and Ireland, bailed out last year, requested access to the latest rescue fund. While on Friday, Portugal warned it will probably fail to meet the fiscal targets it had agreed to as a requirement for its bailout, and Fitch rating agency down-graded the debt-ratings of Spain and Italy.

So the uncertainties in Europe continue.

Meanwhile, economic murkiness also continues in the U.S., as Washington squabbles over whether to pass the Obama jobs bill, whether to provide more economic stimulus, whether to hike taxes on the wealthy, whether to implement stiffer regulations on the financial industry, and so on.

On the good news side, hopes were raised by Friday’s report that although the unemployment rate remained at 9.1%, there were 103,000 new jobs created in September, versus forecasts of only 60,000, and the previous report of zero new jobs in August was revised to show that 57,000 jobs were actually created in August.

Yet, a look inside the numbers revealed a gloomier picture, due to the need for roughly 150,000 new jobs each month just to keep up with new people coming into the workforce.

As employment research firm Challenger, Gray, and Christmas put it,

On the surface, today’s report was better than expected in light of the signs of economic slowdown. However, a deeper look reveals several areas that demonstrate we still have a long way to go before the job market returns to health. For instance, the number of people working part-time for economic reasons increased by 444,000 to nearly 9.3 million. The number of people out of work for 27 weeks or more is still at 6.2 million, higher than a year ago. And the measure of unemployment that takes into account people who have stopped looking for work but still want a job, as well as those working part-time because full-time work is unavailable, increased to 16.5%.

Reports from the housing industry are not likely to lessen uncertainties either. The latest reports show that as of the end of June, thanks to the five-year plunge in home prices, 22.5% of homeowners, or one in five, owe more on their mortgages than their homes are worth. Another stunning report is that the number of vacant houses in the U.S. now stands at 15 million, or 11.4% of all housing units in the U.S. That’s 44% higher than in 2000.

The uncertainty extends to businesses, particularly small businesses, which account for the majority of jobs. The National Association of Small Businesses’ Optimism Index, which measures the confidence of small business owners in the economy, is at a six-month low.

No wonder then that investors are also uncertain, as reflected by the extreme short-term market volatility. The U.S. market plunged 17% from its April 29 top to its August 10 low. And since then, the whip-sawing between brief rallies on hopes, and subsequent sell-offs on disappointments, has been brutal.

Unfortunately, the indecisiveness of those charged with bringing some kind of stability into the picture continues, leaving uncertainty as the likely ongoing diet of consumers, businesses, and investors for a while yet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.