2011 Mid-Year U.S. Economic Update & Outlook

 

Economic Recovery Dependent On U.S. Job Growth

The U.S. economy expanded at meager 1.8 % annual rate (real GDP) in the first three months of 2011, according to statements released by the U.S. Commerce Department. The GDP rate came in slightly below their previous estimates. We can expect that if job growth remains weak for the remainder of 2011, there will be weak income growth & slow consumer spending, which could halt or severely slow down economic growth.  In addition to bank and manufacturing jobs, a lot of construction & housing related jobs have also been lost during the financial crisis & economic downturn.  Jobs in those sectors need to be recovered.

The unemployment rate last year was at a high of 9.8% and has been lowered in recent months to 8.8%. We can expect it to decline, but at a slow and moderate pace.  On 5/6/2011 the U.S. Bureau of Labor reported that the unemployment rate edged up to 9.0% from 8.8%. The number of unemployed was at 13.7 million people in April.  62,000 jobs came from McDonald’s which hosted a national hiring day on 4/19/2011.  But the reality is that Americans will need more than McDonald jobs to pay the mortgage.  The U.S. employment picture hasn’t changed much and the unemployment level is still extremely high. We need to see sustained job growth for several months, and full-time progressive employment.

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Businesses have been deleveraging and hoarding cash since the time of the financial crisis, and have been waiting until the economy stabilizes further. During the first few months of 2011 the economy has continued to stabilize with moderate growth. May’s report from the U.S. Commerce Department indicate that business investment continued to rise 3.4% during the first quarter of 2011, after 7.7% in the fourth quarter of 2010.  Companies are on sounder financial footing than they were last year on a whole, even though the first quarter of 2011 saw corporate profits falling 0.9% compared to a 3.3% increase in Q4 2010.   However, recent earnings (April & May) from companies across industries (from retail to food) have shown improving profit margins and revenues. Banks have also shown better earnings with lower losses and smaller loan loss reserves.

Companies are less cautious, and willing to take on more risks. Berkshire Hathaway had purchased more aircrafts for the NetJets fleet, and auto manufacturers such as Toyota & Hyundai have announced plans to build new plants in the U.S.  Increased business expansion will be a key to long term job creation. Expansion during the first half of 2011 can be expected to cause consumer activity to increase moderately.  But there have also been cut backs and plant closings. Recently, H.J. Heinz  announced they will be closing 5 plants across the U.S., laying off as many as 1000 employees in fiscal 2012.

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Consumer spending expanded at a rate of 2.2% in Q1 2011, following Q4 2010’s 4% increase.  Consumer spending accounts for more than two-thirds (70%) of the country’s economic activity in the United States.  Durable goods (long lasting) manufactured in the U.S., experienced the largest decline in six months, as aircraft and motor vehicle orders fell.   Durable goods orders dropped 3.6% with big declines across the board on orders for machinery, capital goods, defense aircraft, communications equipment, and computers.

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Although some progress has been seen during the first half of the year, only modest economic improvement should be expected to continue for the remaining half of 2011.  It will still take a good while for unemployment to drop back down to more normal levels.  We do not expect it to drop down by the end of this year, but hopefully closer to the end of 2012.

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U.S. Government Debt Situation Worsens

The debt situation in the U.S. continues to worsen, with a current public debt level of about $14.3 trillion (just shy of its debt limit) and a significant portion of it owned by foreign and international institutions & investors. According to the May 18, 2011, Federal Open Market Committee statement, most Federal Reserve officials prefer rate hikes before asset sales. However, they also indicated that they aren’t ready to start executing the plan until they are certain the economy can adequately handle it.  Although we do not expect a QE3 (quantitative easing), loose (easy money) monetary policy can be expected to remain a while longer. See the previous article discussing the impact of the Fed’s decision on monetary policy 4/27/2011 [Federal Reserve Stays The Course & Maintains Decision On Rates].

Fiscal strains at the state and local municipal government levels continue to escalate, particularly those jurisdictions with uncomfortably high pension liabilities such as Alabama. However, fixing the fiscal problems at these lower levels of government will require further restraint than has been observed. Renegotiation of public service contracts and benefit entitlements for retirees & pensions may be needed.  In addition, Federal aid (bailouts) would not be unexpected for individual municipalities and states.

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The problems with debt in the U.S. has a lot to do with entitlements, which is still a large portion of U.S. spending.  U.S. President Barack Obama’s $3.7 trillion 2012 budget (announced February 14 2011) also includes plans to reduce the deficit by $1.1 trillion over ten years through budget cuts and tax hikes.  However it is not enough. We can expect debt problems to continue without any real solution for some time. It is not out of the question that the U.S. could temporarily default on its debt payments, as negotiations between Democrats & Republicans stall.  The impact of such an event on credit markets would be significant and seriously affect confidence in the dollar that has not been previously seen in recent history!

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For the remainder of 2011, it will essentially be a continuation of what we expected from the 2010 Outlook.

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Note: Keep in mind the information in these articles are not meant to be a set of predictions that are set in stone.  It is meant as a discussion of a range of probable scenarios of what we can expect to see happen, based on the information available today.  By knowing the likely possibilities, we can plan for them.  We can also capitalize on potential opportunities, and not be caught off guard by possible negative events.

Thanks & Happy Investing! — The Investment Blogger © 2011

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