Wait and See by Guy Baker
It does not take much financial insight to see the economy remains chaotic and it does not seem to be in a mood to change soon. All of last week's economic data was negative and consumers apparently are getting the message recovery will be a long, long, winding road. For example:
- The final estimate for GDP growth in the fourth quarter of 2007 is still 0.6%. This means the economy grew just 2.2%, in 2007, the slowest growth since 2002. Think Dot com bust.
- Personal spending rose, but only 0.1% in February. This is unchanged over the last 4 months.
- The Conference Board's index of consumer confidence fell to the lowest level in the past five years.
- February durable goods orders dropped 1.7%, after falling - 4.7% in January. Big tickets items are being postponed due to tight budgets and reduced credit.
- Existing home sales did increase by +2.9% in February, but are still down by 24% compared with a year ago. New home sales were down -1.8% in February (30% lower compared with a year ago.)
The Federal savings rate was +0.3% in February. But this does not include 401(k) or IRA contributions. It would seem there is not much margin for consumers to buy their way out of this "recession."
Is there anything that will break this decline cycle? This isn’t spend out, way out as we have in other downturns. Lower interest rates haven't had much impact, and the so-called "fiscal stimulus" – those $300 to $1,200 tax rebates due out in May – will not do much either.
Fortunately, corporate profits are still relatively high, but they've been declining for the past couple of quarters. Slow GDP growth and the tight credit market portend weak profits for the foreseeable future.
An economist for the Vanguard organization summed up the gloomy outlook as follows, "The considerable headwinds presently facing the U. S. economy, including rising energy costs, the housing crisis, and the weakening job market, are finally crystallizing in flagging consumer confidence."
Off-the-cuff remark: with the presidential campaign coming towards us, the next six months of constant harping about how bad nation's problems are, especially the weak economy, and reminding consumers of all the problems they're facing, there is not much to make you think consumer confidence will rebound soon.
THE MARKETS
The month of March is going out like a lamb as far as the markets are concerned. March ends one of the worst stretches in recent market history. The Dow Jones Industrial's [-.17%; -7.90%] and the S & P 500 [-1.07%; -10.43%] fell while the NASDAQ Composite [+0.14%; -14.75%] was almost flat for March.
A silver lining to the Commerce Department's GDP report was corporate profits remain historically high at 11.2% of GDP. But they have been falling for the last two quarters, however, especially profits in the U. S. Domestic profits fell $109 billion in 4Q 2007, including a $74 billion decline for financial corporations. That was offset somewhat by a gain of $56 billion in profits from overseas operations. U. S. firms with large foreign sales are benefiting from strong global growth and the weak U. S. dollar.
Interest rates moved higher in both the Treasury and mortgage markets. That was especially true for 90-day T-bills which recovered quite a bit from last week's knee-jerk "flight to quality." The dividend yield on the S & P 500 still remains almost 1% higher than T-bills.
The dollar slipped back again versus the Euro (€) as foreign investors ponder whether the U. S. is still a good place to put their money. If they decide otherwise, it could put heavy upward pressure on long-term interest rates just as the Fed is working to lower short-term rates. This would cause record yield spreads between short and long-term securities.
The spot price of crude oil jumped up again last week and shows signs of staying above the one hundred dollar level for the foreseeable future. If that happens, our national imported energy bill, already nearly $30 billion per month, could increase significantly, raising gasoline prices and putting more pressure on consumer budgets.
First quarter earnings results will start to be announced in mid-April. If they're decent, the market may start to recover and look ahead to better results in the second half of the year. If not, then the markets could be headed significantly lower. We’ll have to wait and see.
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