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BEING STREET SMART by Sy Harding Is The Economy Already Beginning to Stumble Again? As it has in each of the last three years, the economic
recovery in the U.S. stumbled this summer, prompting the Federal Reserve to
provide another round of stimulus, QE3, in September. For the last several months it seemed like it wasn’t needed,
as subsequent economic reports for August and September indicated the economy
was recovering nicely on its own. The revival of the housing industry was most noticeable with
home sales, home prices, and home-builder confidence rising, while the inventory
of unsold homes and backlog of bank foreclosures shrank. The jobs picture brightened considerably with monthly new
job creations almost doubling. Consumer confidence rose sharply in recent
months, as did retail sales and small business confidence. The main drag seemed
to be continuing pessimism on the part of large corporations, seeing their sales
and earnings affected by the global economic slowdown. As for consumers, the gloom of the summer months in the U.S.
was replaced by optimism, the main lingering concern being uncertainty over the
looming fiscal cliff. But was the economic pick-up only temporary, the optimism
premature? This week’s economic reports are not encouraging. Those reports include that the Chicago Fed’s National
Activity Index (CFNAI) unexpectedly fell sharply in October, its 3-month moving
average plunging very close to the level the Fed says it considers “an
increasing likelihood that a recession has begun”. Durable Goods Orders were
reported to have been flat in October after an encouraging increase in
September. New home sales fell 0.3% in October, and more discouraging, the
previously reported sales for September were revised down by a big 5.1%. The
Fed’s monthly ‘beige book’ report was that all 12 national Federal Reserve
districts unexpectedly reported slowing manufacturing activity this month. And on Friday the Commerce Department reported that Consumer
Spending fell 0.2% in October, after rising 0.8% in September. It was the first
decline in five months. Not a good omen considering that consumer spending
accounts for roughly 70% of the U.S. economy. Hopefully analysts are right in saying the reports for
October were significantly impacted by the effect of hurricane Sandy, which
stormed ashore in the Northeast in the final days of October. But the Commerce
Department says it can’t determine that, and October was pretty much over when
Sandy came ashore on October 29. Its main impact will probably show up in
November numbers. The week’s reports are a reminder of how important it is for
political leaders to reach an agreement that will either avoid the fiscal cliff,
or at least kick it further down the road, given that not resolving it
practically guarantees the economy would fall into another recession next year. However, contrary to apparent popular belief, solving the
fiscal cliff will not mean clear sailing for the economy. All avoiding the cliff
would do is maintain the status quo by preventing additional serious drags from
being dropped on the economy. But will that be enough to allow the economic recovery to
remain on track? This week’s discouraging economic reports for October raise
doubts about that, especially since any agreement is sure to include some of
what both sides insist on, some increase in taxes, and some cuts in government
spending, resulting in some additional drag on the economy. I still expect an agreement on resolving the fiscal cliff
will be achieved. And that the relief will bring a return of optimism to
consumers and investors that will encourage a resumption of consumer spending
for several months, and produce a typical ‘favorable season’ rally in the stock
market through the winter. But if this week’s economic reports are any indication of
the fragility of the economy, new economic worries will arise in the first few
months of the new year. Investors
will need to remain alert, enjoy any rally, but not get caught up in a buy and
hold strategy just yet.
Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com. He can also be followed on Twitter @streetsmartpost Editors: You are welcome to quote from this article, or use it in its entirety, in your publication or on your website, as long as the credit in the above paragraph is also included. Readers are also welcome to e-mail, or print and snail-mail it to friends. These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance. Back to the Top Home Subscribe to RSS Feed
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