<p>Weekly Economic & Financial Commentary</p>
Friends and
Colleagues
We are
wandering in the economic woods…but where are we?
This week,
the Economics Group from Wells Fargo Securities shares some current guideposts
to help us find our way.
First Some
Good News:
·
Earnings have generally beaten expectations,
with cost cutting more than offsetting disappointing news on revenues.
·
Layoffs have slowed, as evidenced by declines in
unemployment claims and claims for unemployment insurance.
·
Mass layoff announcements tracked by the Bureau
of Labor Statistics show some tentative signs of topping out.
·
The Leading Economic Index rose 0.7% this month,
which marks the 3rd consecutive gain, as 7 of the 10 leading economic
indicators improved during each of the past 3 months.
·
Sales of existing homes rose 3.6% in June,
marking the 3rd consecutive monthly increase, with foreclosures and short sales
accounting for only 31% of total residential sales.
On The Other
Hand, Some Bad News:
·
While layoffs may have peaked, hiring shows no
sign of picking up.
·
The unemployment rate reached 9.55% in June, as
~6.4 million jobs have been lost since the beginning of the recession.
·
Real GDP fell in Q2 at a 1.6% annualized rate,
its fourth consecutive decline, but the pace of the decline is slowing.
·
The Consumer Confidence Index fell 5.5 points to
49.3 in June after jumping nearly 14 points in both April and May.
·
It is likely that a considerable backlog of
foreclosed and soon-to-be foreclosed houses will hit the market later this year
and in 2010.
Consumer Credit – Lower Future Demand
·
Consumer incomes, confidence levels and price expectations
are in decline.
·
Well Fargo projects 1.7% growth in real
disposable income for 2009-2010 vs. 3.2% in 2006-2007.
·
They also project “persistently high unemployment rates”.
·
With consumer confidence down, Wells Fargo
projects higher saving rates leading to reduced future demand for credit.
·
Lower expected appreciation of assets like housing
that are typically financed by credit, has further reduced demand for financing.
Some Economic Projections from Wells Fargo Economics:
·
“The
unemployment rate will likely rise upwards of 10% in early to mid 2010.”
·
“With
inventories at historic lows, production is now set to ramp up in the 3rd
quarter which should help to push GDP into positive territory.”
·
“The
economy may expand during the 3rd quarter, but consumer demand is not
improving.”
Three Key Points about the Fed’s Current Strategy
1.
Chairman Bernanke has mentioned that “these
policies would help to raise short-term interest rates” which is the
traditional approach to a monetary policy aimed at limiting liquidity.
2.
The Fed’s attempts to reduce liquidity will
impact the relative returns for all instruments it attempts to sell.
3.
The final issue is not if there is a plan, but
if it will be implemented in a timely manner. We know the Fed has a plan…but will
they implement and follow-through?
