Last Week’s Highlights:

Employment                    5.5%; -62k job loss

Stocks:                               Dow still under pressure

Bonds:                               Yields hold under 4%

Oil:                                    $146 – Record of the week

Dollar:                               Remains soft

Economics This Week:

Date      Item                                  Est.                     Comment

Date      Item                                   Est.                      Comment

7/11       Trade Balance                    -$62 bil                 Slight widening expected

Earnings start this week – Will be focus of the market with little other economic activity

If you’re an economic observer like me, this past week-end was a great time to take the consumers’ temperature.  My simple, completely unscientific conclusion was that we all have started to become a bit more frugal, but have not completely abandoned our spending habits. I noticed that highway travel was down (my highway toll booths had very few lines and much less traffic on the interstate), people stayed a bit closer to home (big crowds at the local fireworks displays) and big gas consumption vehicles (RVs and boats) were parked in the backyard and at the marinas rather than out burning fuel. My local marina operator told me business was off by about 30%.  After last week’s continued struggle in the stock market and on the employment front, it only seems natural that folks are becoming a bit more expense-conscious.

As for the jobs report, the data showed that the unemployment rate held steady at 5.5% but the economy recorded a 62k jobs loss, its six straight month of job reduction. While not a wipe out number, the slow, steady level of lost jobs is now a fixture in the market and weighs heavily on equity returns, as seen in the year-to-date Dow return of -15%.

Some economists are now suggesting “cost-push” (as opposed to demand-pull) inflation that is centered on inelastic goods such as gas and energy items – items that consumers have difficulty substituting for – and this is acting like a giant tax in that we have less discretionary money to spend. It’s also being described as a significant “inflation tax.”  Just what we need as Washington appears to be drawing us towards higher taxes in the coming years.

Q2 to the Rescue

On the flip side, the data for Q2 GDP (July 31 prelim) is starting to look very good. Economic growth appears to be much stronger than initially expected.  The economists at Briefing.com com indicate that second quarter real GDP will be up 2% or more, and the third quarter will post a similar increase.  With over half of the data for second quarter GDP now in, it appears consumer spending is not down as much as was expected. “The May real (inflation adjusted) personal consumption expenditure (PCE) data released on Friday rose a much stronger than expected 0.4%. That followed a 0.2% increase in April. The real PCE data account for 71.5% of real GDP. The April and May data account for two-thirds of the second quarter figure for real GDP, and thus almost half of second quarter GDP (48%),” says Briefing.  Economists at that firm indicate that incomes outpaced the additional drain from higher gas prices, that second quarter real GDP will be up 2% or more, and the third quarter will post a similar increase.

Fed Hike In the Works? Not Likely

As you can see from the fed funds futures chart below, the market now thinks the Fed will hold rates steady at the August 5th FOMC meeting.  Just two weeks ago the market had started to price in a 25 bps rate increase at the meeting, but that probability now stands at just 25%, compared to the 70% probability of no change from the Fed.  It appears the market now thinks that the uncertainty in economic growth, or lack thereof, is a bit greater than the near-term risks of higher inflation.  This balancing act for the Fed will be one that it will struggle with the rest of this year, but for the moment, it has decided that overt liquidity infusion will be a toll it will put on the back burner.

Source: Cleveland Fed

Lighter Side:  Improved Consumer Products!

Source: Internet

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