Chief Executive Officer Newsletter
July 2010
Welcome to the CEO's monthly economic newsletter. The newsletter provides a basic narrative overview of recently published economic indicators for your reading pleasure. You should not rely on this information when making investment decisions, but rather seek professional advice from qualified investment brokers.
Economic weakness seems to be crying out from all parts of the world. We have gone from most economists having a high degree of confidence in continued economic growth to many suggesting another recession could be on the horizon. Let’s all hope the latter is wrong. Gross Domestic Product for the first quarter was adjusted downward one last time; this time to 2.7% from 3%. Second quarter called for 4% growth, which now seems very unlikely. We also saw the Institute for Supply Management Manufacturing Index fall from 59.7 to 56.2. The index remains well above the expansion level of 50, although we need to be concerned about establishing a negative trend-line. Nevertheless, right now, one month is only reason for pause.
Our biggest problem remains private sector job growth. We continue to witness first-time jobless claims of around 470,000, while non-farm payroll expansion has just not happened the way congressional leaders had hoped, given the stimulus they pumped into our economy. While unemployment declined from 9.7% to 9.5% last month, over the past couple of months there have been about 2 million people drop out of the labor force, and soon we will watch a number of census takers finish their data collection and become unemployed. Based on these data points, we will likely see unemployment increase before the end of this calendar quarter. Meanwhile consumer spending has slowed, as evidenced by a $25 billion dollar decline in consumer credit. On the one hand it is a good thing to see deleveraging of debt, but on the other hand, without spending, we cannot expect much in the way of real job growth.
As expected, housing has been seriously maligned by the media as failing. The May numbers saw huge percentage declines in sales. This should not have been a surprise to anyone, given the end of the homebuyer tax credits. We saw weakened auto sales at the end of “cash for clunkers” followed by reasonable sales growth for autos. Residential real estate sales should be no different. The irony of the present situation, however, is that home owners and buyers should be running to their realtors and banks to put deals together in view of the substantial recent reduction in home loan interest rates. As of July 9th, many lenders had rates for 30-year fixed rate mortgages at or near 4.5% without points, and if 15-year amortizations caught your fancy, the rates were near 4.0%. The tax credit pales in comparison to the interest savings over the life of the home loan.
Inflation is still very tame and according to recent comments from a number of FOMC Fed Governors, deflation remains an important consideration for them. Both the core rates of inflation for consumer and producer price indexes suggest interest rates are going to stay low for some time. Clearly consumer demand is weak, as evidenced by the pay-down in consumer credit. As spending does pick up, we can expect to see both wholesale and retail prices increase. In turn, private sector job growth will also pick up; we will then see interest rates climb back to more traditional levels. At present, however, most rate forecasters do not anticipate any meaningful short-term interest rate increases until the later half of 2011. Long-term interest rates may move up sooner.
Dennis A. Long
Chief Executive Officer
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