We Are Not Out of the Woods Yet

Posted on March 29, 2012

The opinion of a growing number of Americans is that the U.S. economy is getting better. Even though the consumer confidence index dropped this month, it is still close to its highest level in a year. Consumer confidence along with consumer spending will continue to rise as long as the labor market maintains traction. Lay-offs by larger firms are diminishing and companies are indicating that they are willing to expand their workforce as long as there is evidence of improving sales. The U.S. economy grew at an annual rate of 3.0% in the fourth quarter of 2011 due to increased household spending. It is expected to fall to 2.0% this quarter. In February, the Labor Department reported that the unemployment rate held at a three year low of 8.3% following five consecutive declines. Orders for durable goods increased 2.2%. Not as high as expected, but at least in the right direction. That’s the good news. Unfortunately, there are two sides to this coin. U.S. Fed Chairman Ben Bernanke said that while he is encouraged by the latest unemployment numbers, he believes that continued accommodative monetary policy will be necessary to produce further employment gains. He considers this latest improvement as “a reversal of the unusually large layoffs that occurred in 2008 and 2009.” In addition, millions of workers dropped out of the labor market as a result of the deepest recession since the Great Depression. While so many disheartened Americans, who really wanted employment and probably still do, left the workforce, lowering the official unemployment rate, there are a million veterans returning home, from Iraq and hopefully Afghanistan, that will be seeking and needing jobs. Bernanke indicated in a recent lecture that consumer spending is still too weak to ensure a healthy pace of economic growth, and that a continuation of low interest rates and an easy monetary policy would be prominent in cutting U.S unemployment. However, the U.S. is not an island unto itself. While the U.S. is the big man in the game, there are many other players that influence and impact global growth. Austerity programs are not generating the desired result in the Euro zone. Spain and Italy’s output is declining. Greece is in a downfall, and even Germany and the U.K. are slowing down. A key indicator of business sentiment in Europe unexpectedly fell pointing to recession. The alleviation of stress of the sovereign debt crisis has noticeably failed to achieve an enduring improvement in business outlook. The austere economic measures designed to narrow the budget deficits are not doing enough to offset the slowdown in their economies. The dilemma of a lack of strength and confidence in European financial institutions remain unresolved, putting U.S. banks’ assets at risk. Let us not leave China, the world’s second largest economy out in the cold. China’s export orders have diminished and their domestic demand continue to soften. The immense Chinese manufacturing sector has contracted for five months in a row. Besides the U.S., the European countries have become a strong trading partner with China as well. As such, China’s economic slowdown has a spoiling impact on the recovery of euro zone regions. Will China continue to manipulate their currency (Yuan) to lower ranges to preserve their exporting advantage? Will the Federal Reserve initiate a QE3 to stimulate the U.S. economy? According to the fed chairman, this will help generate new jobs and keep interest rates low, which in turn will weaken the U.S. dollar, and thus give support to U.S. exporters? Two different approaches to influence the direction of currencies; same result. The United States is once again the Steam Engine of the global economic recovery, but this time it could use a little help from the Caboose. For questions/information contact Joel Borshof joel@imexfx.com

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