El Erian: Economy losing momentum for recovery

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4 Responses to El Erian: Economy losing momentum for recovery

  1. Anonymous says:

    by Sy Harding
    Why We May Already Be In Recession! August 27, 2010.
    First let’s look at the trend.
    After an unusual four straight quarters of negative growth in the severe 2008-2009 recession, the recession ended in the September quarter of last year when GDP managed fragile growth of 1.6% for the quarter, and then improved to 5.0% growth in the December quarter.
    It was understood that much of that growth was temporary, fueled by government spending, and spending by consumers provided with government bonuses and rebates, as well as temporary rebuilding of inventories by businesses. But it was expected that with that jump start the recovery could continue on its own legs.
    So, it was a bit of a surprise when GDP growth slowed to 3.7% in the March quarter of this year while those programs were still having an influence. But economists still expected the economy would grow at a 3% pace in the June quarter even with those programs winding down, and for the rest of the year.
    So, it was a real disappointment when 2nd quarter growth was reported a month ago as having been only 2.4%. And when additional data became available for May and June, the last two months of the 2nd quarter, and those reports were increasingly negative, economists predicted that Q2 GDP growth would be revised down to only 1.3%.
    On Friday, the revision was released, and it showed Q2 growth slowed significantly, but only to 1.6%, not as bad as the latest forecast.
    The media and the stock market, starving for good news, and short-term oversold after being down 10 of the previous 13 days, took it as a positive.
    But let’s get real.
    The issue is not whether economists got their forecast right or wrong, but the degree to which economic growth is slowing. And a trend of 5% growth in the December quarter, followed by a 1.3% decline to 3.7% growth in the March quarter, followed by a 2.1% decline to 1.6% growth in the March quarter is a chilling rate of decline.
    Now factor in that economic reports so far for July and August, the first two months of the 3rd quarter, have been significantly worse than those of May and June, and significantly worse than economists’ forecasts, with the relapse pretty much across the board; in the housing industry, manufacturing, retail sales, consumer and business confidence, the decline in U.S. exports, and so on.
    It’s not a stretch then to think that economic growth is declining by another increment of more than 1.6% this quarter, which would have it in negative territory, already in recession.
    In his speech Friday morning at the annual economic symposium in Jackson Hole, Wyoming, Fed Chairman Bernanke, while saying he still expects the economy to grow in the second half “albeit at a relatively modest pace” did not put forth a very convincing argument, using such phrases as “painfully slow recovery in the labor market”. . . “economic projections are inherently uncertain”. . . . “the economy is vulnerable to unexpected developments” . . . “the recovery is less vigorous than we expected.”
    Nor did he seem confident that the Fed’s depleted arsenal of tools to re-stimulate the economy would be effective if needed. Two of the four possible actions he mentioned seemed to suggest consumers and markets could be fooled into confidence with mere talk.
    His brief list of four possible actions were, “1) conducting additional purchases of longer-term securities [bonds and mortgage-related securities]; 2) modifying the Fed’s FOMC meeting communications to investors; 3) reducing the interest the Fed pays banks on their excess reserves. And I will also comment of a fourth strategy, proposed by several economists- namely, that the Fed increase its inflation goals.”
    Providing details on two of the four possible actions, he said, “The Fed’s current statement after its FOMC meetings reflects the FOMC’s anticipation that exceptionally low interest rates will be warranted ‘for an extended period’ . . . A step the Committee could consider if conditions called for it, would be to modify the language to communicate to investors that it anticipates keeping the target for the federal funds rate low for a longer period of time.”
    And of the fourth possible action in his list of four, he said the Fed could alter the phrases it uses to communicate its goals for inflation by “increasing its medium-term inflation goals above levels consistent with price stability.”
    That’s scary stuff if those are two of the four actions the Fed sees as its best options to re-stimulate the economy.
    Also of concern, in its report revising Q2 GDP growth down to just 1.6%, the Commerce Department reported that corporate earnings declined significantly in the second quarter, after-tax earnings rising just 0.1%, compared to the gain of 11.4% in the first quarter. Meanwhile, Wall Street continues to ratchet up its earnings estimates.
    On the positive side, consumer spending, which accounts for 70% of the economy, rose 2% in the second quarter, compared to 1.9% in the first quarter. But the bad news is that the reports since, on consumer confidence and retail sales in July and August, have been big disappointments.
    Putting it all together, don’t be surprised if a couple of months down the road we learn the economy was already in recession in the current quarter.
    Sy Harding is president of Asset Management Research Corp, and editor of http://www.StreetSmartReport.com, and the free daily market blog, http://www.streetsmartpost.com.

  2. Anonymous says:

    Debt, Depression, Default. America is in Deep Trouble
    By Eileen F. Toplansky
    Consumers are spending less. Small retailers are closing shop — even cable television subscriptions are seeing a loss in revenue. Mike Shedlock of globaleconomicanalysis.blogspot.com cites reports by Jacqui Cheng of Ars Technica, Mercedes Cardon of Finance Daily, and Jon Chavez of the Toledo Blade, highlighting America's economic woes with the following:
    * Cable TV companies saw a noticeable drop in the total number of subscribers… a first for an industry that has thus far seen nothing but growth.
    * In Toledo, Ohio, ‘for lease' signs have proliferated along the Monroe Street-Talmadge Avenue corridor, once the crown jewel of commercial real estate. Even more shocking are signs that feature ‘free rent.'
    * More small retailers have left this corridor than have arrived in the last few years.
    * Saks is closing two stores in Plano, Texas and Mission Viego, California. This is in addition to stores closed in San Diego, CA; Portland, OR; and Charleston, SC.
    * Abercrombie and Fitch are closing nearly 60 under-performing stores in 2010.
    * Blockbuster video rental chains are slashing stores by the dozens.
    * American Apparel is close to defaulting on its loans and may also have to close stores.
    * Wal-Mart, which usually does well during difficult economic times, is also concerned about customers being quite cautious about spending.
    * A&P will close 25 grocery stores across five states.
    * American Eagle announced that 28 Martin + Osa stores would shut down.
    * French Connection 17 has closed all 21 of its stores in Japan and has closed all but six of its U.S. stores.
    * Winn-Dixie Stores will close 30 older and under-performing stores by September 22nd of this year.
    * Bebe Stores will shut 48 facilities.
    * Men's Wearhouse now plans to close 50-60 Tux stores this year.
    Consider the number of people that will be laid off when these stores are closed. Think of how these store closings will affect lease prices.
    Coupled with these facts is the August 26th announcement that “Standard & Poor said in order for the United States to keep its AAA-rating, it is ‘very important' for Congress to deal with the cascading United States debt. China's largest credit rating agency Dagong Global Credit Rating Company was less diplomatic: they simply downgraded the U.S. credit rating to AA.”
    Furthermore in Bloomberg Businessweek, Matthew Brown writes that “[w]hile the U.S. government's debt is 53 percent of GDP, one of the lowest ratios among developed nations, its debt as a percentage of revenue is 358 percent, one of the highest[.]”
    Though “outright sovereign default in large advanced economies remains an extremely unlikely outcome[.]…current yields and break even inflation rates provide very little protection against the credible threat of financial oppression in any form it might take.”
    According to Daniel Hoffman, as of August 14, 2010:
    The total amount of national debt is $13.3 trillion.
    The debt per citizen is $42,983.
    The debt per tax payer [remember not everyone pays taxes] is $120,194
    According to the Congressional Budget Office, by 2020 the debt will explode to $23.5 trillion.
    Investors Business Daily states that “no doubt alarmed at the headlong plunge into fiscal irresponsibility by both the White House and the Democrat-dominated Congress, Wall Street is starting to fret that the recklessness could touch off another financial crisis.”
    If the debt continues to soar, and under Obama, it will, “the dollar would implode and prices for foreign goods — which now make up 15% of our economy — would soar. Private investment would shrink, and along with it, private-sector GDP.”
    Thus, items we customarily purchase, i.e., shoes, clothes, cars would become too expensive. Consequently, the American financial woes would result in a global financial decline. The enviable American standard of living will decrease and the next generation will be saddled with insurmountable debt, not of their making.
    Investors are understandably wary of investing. The economy is being crippled every day and the debt crisis brought on by the Obama administration is crippling America and future generations of Americans.
    And, yet, all of this is avoidable. It is all due to unrestrained spending by the federal government. And, furthermore, the canard that the “rich will pay for it all” is nonsense. This is another refusal to face facts. According to Larry Elder, “[f]or the 2007 tax year (the latest income tax data year released by the IRS) the top 1 percent of income earners, those making over $410,000 a year, paid 40 percent of all federal income taxes. [But] the top 5 percent, those making about $160,000 a year or more, paid 60 percent of all federal income taxes.” Moreover, “the rich are not the only ones to benefit from the Bush tax cuts. Extending cuts to the non-rich would ‘cost' the government about $140 billion next year. Extending the cuts to the rich would ‘cost' about $40 billion next year. If the tax cuts only benefit the rich, why would the Treasury “lose” more money from the non-rich than it would ‘lose' from the rich?”
    As corporations continue to downsize, the “rich” get poorer; the middle-class get poorer and everyone suffers. As Margaret Thatcher once said, “the trouble with Socialism is that eventually you run out of other people's money.”
    The “tea bags” need to be thrown into the Potomac every day until Congress and Obama get the message. Better yet, the voting booth levers need to be pressed very hard come November to unseat those who are ruining America.

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