By William Patalon III
Money Morning/The Money Map Report
When the initial estimates for the just-concluded second quarter are released next week, they're expected to show that gross domestic-product (GDP) declined for the fourth quarter in a row.
That hasn't happened in roughly 70 years – the last time being during the Great Depression. But the story should change in the third quarter, which began July 1. Many analysts predict that GDP growth will turn positive during the current quarter, and some will take that as evidence of an economic rebound – that is, that the recession is over.
And if the recession is over, these analysts argue, the U.S. Federal Reserve should throttle back on money-supply growth and start raising interest rates back toward a more-normal level, even as the Obama administration throttles back on the spending from its $787 billion stimulus-spending plan.
But there's a problem.
Even if statistics "show" that the U.S. economy is in a recovery mode, it's not going to feel like it. Consumer spending isn't going to zoom upward, and companies aren't going to suddenly start hiring.
Here's why. Although it's true that the U.S. economy will post positive gains for the first time in more than a year during the current quarter, most Americans won't feel it: Debt levels remain out of control and joblessness continues to soar – to the point that the country faces a high probability of a "jobless recovery," and a period of weakness or outright non-growth that can be expected to last a year or even longer.
Two things in particular – high consumer debt levels and fears about escalating joblessness – are likely to hold down consumer spending, which through the years has become an increasingly crucial element of the United States' economic firepower.
In the 1960s, consumer spending accounted for about 63% of GDP. In the 1990s, it rose to 67%.
Today, however, thanks to the easy access to credit that has enabled consumers to spend more than they made, consumer spending stands at a record 72% of GDP.
Without consumer spending as a catalyst, the economic malaise will continue.
"The over-indebted U.S. consumer – whose de-leveraging process yet has to start – will likely continue to put the brakes on consumption, while the savings rate continues to creep up," Nouriel Roubini, head of RGE Monitor and one of the few economists credited with seeing this recession coming, told MarketWatch.com.
In fact, it could take until 2018 for consumers to de-leverage enough to get back to the historical norm for consumer spending, researchers at the San Francisco Fed concluded.
Then there's the jobless recovery.
The unemployment rate is currently 9.5%,.
Most of the job losses are permanent; right now, in fact, there are six people out of work and searching for every job opening. With that much competition for the few open jobs, wages have actually fallen at a 5% annual rate during the past six months, the largest decline in the half century such statistics have been kept.
The upshot: It could take "five or six years" to bring the unemployment rate down to its historical normal of about 5%. This all means that for the U.S. economy to rebound and achieve healthy, long-run growth, consumers must find a way to restructure and spend more, or the economy must undergo the kind of makeover that will make it less dependent upon consumer spending.
Neither scenario is likely in the near term.
Investors last week analyzed the less-than-dismal corporate earnings news and decided that Corporate America is back on its feet, the U.S. economy is recovering and the markets were oversold.
By the end of trading Thursday, the Dow Jones Industrial Average had pushed past 9,000 to its highest close since early November and the Nasdaq Composite Index remained on a 12-day winning streak. Technical traders (those seeking trends via charts) joined the party once the Standard& Poor's 500 Index surged past 950, and the naysayers' voices grew fainter as the week progressed.
In reality, a substantial contingent of analysts (and not just the bears) believe the recent upward moves have been overdone and think the markets are due a pullback in the days, weeks and months to come. The most pessimistic of the bunch think that a retest of the March lows remain a possibility.
Thus far, earnings season has been a major success, as companies across various sectors have posted better-than-expected results or, at least, offered solid outlooks for the quarters that follow. Apple Inc. (Nasdaq: AAPL) was one such company, reporting strong sales of iPhones and Macs, the latter product going against the grain of sagging computer sales overall. Ford Motor Co.'s (NYSE: F) debt-reduction measures helped it return to profitability last quarter while its rivals turned to the government for survival.
Of course, when expectations are so low, even mediocrity looks decent. Equipment-maker Caterpillar Inc. (NYSE: CAT) said its earnings plunged 66%, but management said that it sees indications of stabilization and raised its 2009 forecast. AT&T Inc. (NYSE: T) said that its earnings fell, but still topped analysts' expectations and the iPhone craze offered future promise as well. Yahoo! Inc. (Nasdaq: YHOO) announced its first earnings increase since the first quarter of 2008, as many of its investors await a possible search partnership with Microsoft Corp. (Nasdaq: MSFT) to take on market leader Google Inc. (Nasdaq: GOOG). Not all news was positive, however, as Microsoft suffered its first yearly revenue decline since the company went public in 1986. And Amazon.com Inc. (Nasdaq: AMZN) failed to surpass earnings projections, disappointing analysts who have grown accustomed to quarterly surprises from the Internet retailing pioneer.
Wells Fargo & Co. (NYSE: WFC) and Morgan Stanley Inc. (NYSE: MS) bucked the trend for positive news from financials as the latter company's chief executive officer complained that his company became too conservative in the challenging times.
By Friday, stock traders enjoyed a day of lackluster activity, booked a few profits (as the Nasdaq streak ended), slapped some high fives, and departed a bit richer for the week. The major equity indexes surged upwards of 4% for the week and are all "in the black" (for now). Let's hope next week's earnings bring even more optimism (investors don't want to be caught standing when the music stops).
Year Close (2008)
Qtr Close (06/30/09)
Dow Jones Industrial
10 yr Treasury (Yield)
Fed Chair Bernanke took his "positive" message to Capitol Hill, and spoke to Congress about the success of the stimulus packages that have been enacted and explained how the economy is stabilizing, but the rebound "will be weak compared with historic recoveries…"
He also assured lawmakers that the Fed will keep rates at "near zero" as unemployment remains a bigger issue than inflation in the current environment. Bernanke talked in detail about the global financial system and impressed upon Congress that the United States cannot be expected to "drive the world economy" on its own. The Fed also proposed new mortgage and home equity regulations that are designed to offer greater consumer protections from the perceived predatory practices of certain lenders.
Politicos continued their "delightful" banter over healthcare with certain Democrats, raising issues over the proposed increased taxes. Meanwhile, U.S. President Barack Obama extended his timetable for Congress to reach consensus and also took to the airwaves to make his points about the crucial need for reform (after seeing his approval rating on this issue slip before his eyes). Republicans chimed in to accuse the president of socialism, so it remained "business as usual" in the nation's capital.
Businesses already struggling to make payrolls got more challenging news this week as the minimum wage jumped from $6.55 to $7.25 an hour. A Washington research group projected that 2.8 million workers will be directly impacted by the increase, while another 1.6 million above minimum wage earners may see their compensation adjusted as well.
While many employees rejoiced at the extra funds soon to hit their pocketbooks, others grew even more concerned about the potential consequences. More than 3 million jobs were lost in the first half of the year and employers may be forced to make additional cuts rather than incur higher labor costs. The unemployment rate is hovering around 9.5% and the consensus is that the nation's jobless rate will reach 10% by year-end (though some credible researchers say unemployment could reach as high as 12%.
The economic calendar was rather light during the week, though the limited news was well-received just the same. Leading economic indicators rose for the third straight month, another promising sign of an upcoming recovery. Likewise, the housing sector got a boost as existing homes sales climbed 3.6% in June and prices jumped to their highest level in eight months. Finally, a consumer sentiment index (Reuters/U of Michigan) beat analysts' expectations.
Weekly Economic Calendar
Leading Eco Indicators (06/09)
3rd straight monthly increase in forecasting index
Initial Jobless Claims (07/18)
Higher claims distorted by auto plant layoffs
Existing Home Sales (06/09)
Highest level of prices since October 2008
The Week Ahead
New Home Sales (06/09)
Consumer Confidence (07/09)
Durable Goods Orders (06/09)
Fed's Beige Book
Initial Jobless Claims (07/25)
GDP (2nd Qtr)
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.