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It’s noon on Thursday, and the Dow currently sits just below 12,000. It’s been a horrible week for financial markets, but I expect that there will be a turnaround heading into the weekend. Here are several reasons why I expect the market to turn:
1) Jobless Claims
Although it remains elevated, the number of newly laid-off workers filing applications for unemployment benefits dropped a bit last week. Layoffs are no longer accelerating but appear to have reached their peak trend for this downturn. Jobless claims are a leading indicator; therefore, if it is true that jobless claims have hit their peak trend, it should be viewed as a positive for the U.S. labor market going forward.
2) China’s Oil Proclamation
As every American knows, oil prices have been a large economic concern recently. Oil prices dipped $3 today, on the news that China (a socialist state) will raise retail gasoline and diesel prices. China can alter world demand by artificially setting their price low. In other words, the state buys oil at market value but then sets the price. This price, which the government sets, can be artificially low. Considering that the Chinese economy is booming, it made sense for the Chinese government to subsidize their consumers. The fact that they have increased prices for the consumer is good news for U.S. consumers, however, because that means over time there may be more supply for U.S. consumers as Chinese demand decreases slightly. If this did occur, the fundamental price would decrease. The price decline we saw today was mostly speculative, but as we’ve mentioned in these pages in the past, a large amount of the price is due to speculation.
3) Conference Board’s Leading Indicators
The Conference Board’s index of leading indicators rose 0.1% in May, following a similar increase in April. This is important because the Conference Board’s index of leading indicators shows the expected trend over the course of the next few months. The May result bettered the consensus estimates. The last time the index recorded consecutive monthly gains was in September and October 2006. Although GDP has been sluggish, the economy does not appear to have contracted significantly in the first half of 2008 and downside risks have diminished. The recent trend for the leading index supports this contention.
Weights:
Despite the uptick in other indicators, weights remain. One such weight was highlighted in the Philly Fed’s Survey. Specifically, the manufacturing picture from the Philadelphia Federal Reserve stirred some concern that a drop in demand and increases in prices for commodities like oil are buffeting some businesses. If this continues, it will remain a risk to economic growth.
Summary: For the most part, the economic indicators released today were somewhat optimistic. Specifically, we received optimistic news regarding the U.S. labor market, oil prices and the overall outlook—via leading indicators. Nevertheless, concerns remain, as was highlighted in the Philly Fed’s survey. If one believes that the decline in the market over the past few days was somewhat speculative, as I do, these indicators will most likely turn sentiment. I expect this to occur by week’s end. As such, look for the Dow to rebound, jumping well beyond 12,000.
If you are looking for more analysis or client-specific work, please contact me at schmidpat@regionaleconomiccon sultants.com
Now that Hillary Clinton has conceded and the Democratic nomination is finally behind us, we can finally take a look at the upcoming election. Coming off their respective nominations, Senators John McCain and Barack Obama will battle it out. Although a number of factors come in to play in deciding an election, economic conditions typically play a major role. In fact, most elections can be predicted if one can gauge voters' perception of the economy correctly.
This is nothing new. During the Great Depression, F.D.R. defeated Herbert Hoover and the Democrats held the White House for the next 20 years. In the 1980s, when inflation hit double digits and the economy was in the midst of a recession, Ronald Reagan easily defeated President Jimmy Carter. Four years later the U.S. was booming, and President Reagan once again rolled to reelection.
As indicated, the economy is a major factor in deciding elections. Let's look at the economic facts of today and then we will try to be as succinct as possible in gauging their possible affects on the upcoming election. First, the housing market is a complete mess and has been for quite some time. Second, the credit contagion from the housing market has seeped into financial markets. Even investment grade firms have found it difficult obtain financing. As such, job growth is slowing and the unemployment rate has jumped. Moreover, GDP growth in the first quarter was dismal and it is not expected to be revised up. In fact, many believe we are in the midst of a recession or a contraction in GDP. Finally, inflation is a major concern. Oil prices have peaked recently hitting $140 a barrel. Food prices are also crippling consumption, which is already struggling due to the decline in mortgage equity withdrawal.
Don't let this economic jargon scare you. The basic gist is that the economy is a mess. Can it improve? Sure. But, will it in time for the election? Most likely,... no.
If we look at just one economic indicator (say job growth) and attempt to discern its correlation with the incumbent party winning an upcoming election, we will find telling results. As job growth slows going into an election, the incumbent almost always loses. And this is just when we are looking at one economic indicator. We have just mentioned several, and as I am sure you know by looking at your wallet, most are not looking too good.
So, what's the point? Well, if you trust at the economic theory and empirical evidence, Barack Obama will almost certainly become our next president because the economy is in shambles and voters will most likely blame the incumbent party--in this case the Republicans. This isn't to say that John McCain doesn't have a chance. He just has an enormous disadvantage. The wild cards are going to be voter’s feelings on the candidate’s capabilities when it comes to National Defense and Morality. Personally, I don't feel there's "enough" of a difference in the candidate’s platforms in either of these spectrums to alter voters' economic perspectives. So, I'm going to predict it now.... Barack Obama will be our next president.
If you are looking for more analysis or client-specific work, please contact me at schmidpat@regionaleconomiccon sultants.com
Intro
We will be getting a bag of economic goodies on Tuesday. These releases will most likely decide the course of financial markets for the next two days. The releases cover everything from housing to inflation to production to oil inventories.
Housing
On Monday, the NAHB housing market index fell to its lowest point since December of 2007. This point had not been reached since 1985. The index highlighted the weak demand for housing across most regions in the U.S. On Tuesday, we found out how new residential construction is faring. Unfortunately, it was not good news. After unexpectedly rising in April, housing starts fell back below 1 million units. Starts are down 55% from their 2006 peak and are at their lowest level since the 1990s. All told, the housing market remains in flux. An improvement in demand is needed before we see an increase in supply and a stabilization in prices.
Prices
As was expected, there was little good news in the May PPI release, with inflation rapid at all stages of processing. After pausing in April, rapid price increases returned among food and energy products. It should be noted, however, excluding food and energy products, core inflation remains somewhat tame among finished producer goods. Nevertheless, higher prices for food, energy, and other production inputs are putting considerable pressure on top-line producer prices.
The rise in producer prices may force the Fed's hand. They may need to raise rates in response to increasing inflationary concerns. Although an increase in rates will tame inflation, it will most likely result in slower economic growth.
Industrial Production
Industrial production fell 0.2% in May, following an outsized 0.7% decline in April. This rate of contraction was less than what had been expected in concensus estimates. However, it is still a contraction and, therefore, not good news. The report is consistent with continued modest declines in the manufacturing sector.
Oil Inventories
Tomorrow, a report on oil inventories will be released. Since, most of the news up until now has been somewhat dismal, this will be a very important release. It will most likely decide the direction of the market on Wednesday.
Market Summary
Financial markets will most likely take a hit on Tuesday. The reports released this morning have been sour across the board. The only positive released was that industrial production didn't fall by as much as expected.
By Wednesday, stocks should rebound at least until 10:30 when oil inventories are released. This report will most likely decide the direction in the market throughout the remainder of the afternoon.
If you are looking for more analysis or client-specific work, please contact me at schmidpat@regionaleconomiccon sultants.com
Trends
Americans are struggling. The average American household's net worth and income are down from a year ago. Households are also being hit by a tough job market that is constraining wages and higher costs for fuel and food. Meanwhile, more housing markets are experiencing a vicious cycle of home price declines and foreclosures.
We’ve seen the government attempt to respond, but thus far it has fallen short. What’s in store for the next few months
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An unprecedented combination of events has led to the current economic climate, which some deem as a recession. The economic slowdown began with the downturn in the housing market. Price and sales growth shrank to the point where builders began walking away from projects. Building permits and housing starts took a tumble in response. As prices slid further, interest rates reset and many borrowers (especially those considered subprime due to their weak credit status) were not able to afford their mortgage. In response, mortgage lenders tightened their lending standards across the board. The housing-related credit problems slowly seeped into financial markets causing a credit crunch—a situation where highly rated business had trouble obtaining financing. The volatility was evident in most financial markets.
As corporations scaled back capital investment, they also scaled back hiring. Layoffs have been pervasive over the past few months
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Intro
Oil prices have skyrocketed over the last year, leaving consumers bewildered. The question of "why oil prices have risen so rapidly?" remains largely unanswered. It appears the price increase is partially due to fundamentals, but other factors do come in to play
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Economic Info:
Regional economic growth slowed in April. Labor markets highlighted the contracting macroeconomy. According to the most recent BLS report, only ten states registered month-to-month growth in employment. The West South Central is the only region holding up. The expansion in Texas and Louisiana bolstered growth in this region
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Comment by Patrick Schmid
on Why Are Oil Prices So High?