QUARTERLY ECONOMIC REVIEWS, 2010
FIRST HALF, 2010: I am reminded that there is neither such thing as a perfect Labrador retriever nor an absolute horrid one. A goofy ear set may occasionally appear on a champion and what looks like a mix may otherwise have the best spring of rib to keep it high in the water during a retrieve. Likewise, the economy. Economic growth is not all good, yet, there will always be growth somewhere?!
By May, the US dollar was stronger, unemployment down, manufacturing up, consumer confidence and demand up and inflation down! Yet, the oil spill and troubles in Greece and Spain caused upset here along with a dip in indicators and a blip up in jobless claims. The Koreas were feuding, Israel raided Turkish ships, Russia and China agreed to Iranian sanctions and the Iceland volcano wound down and air traffic resumed.
Stock volatility exploded on May 6 with an eventual regulatory response. Yet, we entered official “correction” as the market was down 10% from its April highs. We were reminded that 237 banks had been closed since the downturn in 2008 with 775 more identified as problematic. Bank lending in Europe and the US continues to be restricted and now corporations are not successful with bond issues. Flights to quality sent the yields on US Treasuries from over 4% to a low of 3.09%. Who would have been predicting a DECREASE IN INTEREST RATES? It even led to a changed direction for the infamous PIMCO bond manager!
So, we end the first half of 2010 with an economic puppy whose industrial production (growth) is booming but is also stumbling in the housing sector since the tax credits for home purchases (nutritional supplement of mom’s milk was removed) ended 4/30. The Fed’s latest statement being, “conditions are less supportive of economic growth,” yet the momentum of income and savings growth paves the way for faster spending ahead. China’s growth has been slowed as labor disputes resulted in a 20% increase in minimum wage spelling better news for Asian counterparts who will now inherit the textile industry, now too expensive in China.
FIRST QUARTER, 2010: So much debate! Helps remind us that nothing is black and white. We’ll see what comes next as health care plays out or gets carved up; intrigue will be played with the variations on the themes of recovery and concern. The Fed has a PR challenge ahead. I might point out that the press reports the debate over interest rates as if that were the Fed’s only tool, while Bernanke has said he would utilize other tools before changing interest rates to begin contracting the economy and avoid inflation. 1) The $1 trillion program of buying mortgage backed securities just ended and the private sector is stepping up to the plate. Selling these MBS loans will send mortgage rates up. This selling will get monetary policy back to normal. 2) The Discount rate was raised from .50% to .75% to give banks incentive to park money with Fed rather than to lend. This rate may temporarily replace the fed funds rate that the media are reporting about. Other optimistic signs include seeing repayments of TARP money, consumer spending improvements, and more economic stimulus money being released. The Dow Jones hit an 18-month high in late March. Employment figures have improved in 3 of the last 4 weeks. Of course, all this is about the short term. I’d like to bask here for a while… be in the moment, don’t ya’ know? And finally, interest rates are edging up.