A quick glance shows most data to be disappointing

Friday, April 29, 2005

A glance on today's economic indicators shows no relief for the bulls:
Employment Cost Index: Actual 0.7%, Consensus 1.0%, prior 0.8%
Personal Income: Actual 0.5%, Consensus 0.4%, prior 0.4% (revised from 0.3%)

Personal Spending: Actual 0.6%, Consensus 0.4%, prior 0.7% (revised from 0.5%)

Consumer Sentiment: Actual 87.7, Consensus 88.9, prior 92.6

Chicago PMI: Actual 65.6, Consensus 62.5, prior 69.2

Deducting food and energy prices, the core PCE index, Alan Greenspan's favored inflation measure, rose 0.3 percent, topping its 0.2 percent February gain. Year over year, the price index for personal consumption was up 2.4 percent, versus an increase of 2.2 percent in February, Reuters reported.
Consolidating these figures with the previous shocking indicators of the last days there is only one conclusion permitted: The economy in general is on a downward path.
Never mind the positive earnings surprises of the mega corporations we have seen recently, the mom-and-pop stores on Main Street USA will be feeling the pinch once interest rates rise more. And that will be as soon as next week.
The consumers' willingness to permanently spend more than they earn - as the figures above show - will come to a screeching halt once the coming interest rate hikes of the Federal Reserve begin to bleed through to their ARM's (Adjustable Mortgage Rates) and the effective interest they pay on their credit card balances.
They will have no other choice than to reduce their spending. The U.S. personal saving rate declined to 0.4 percent in March from February's 0.5 percent, hitting its lowest level since October 2001. At the same time, first-quarter worker compensation posted the smallest increase in six years, just 0.7 percent, as hefty bonuses paid on Wall Street at the turn of the year evidently were not matched on Main Street, the Reuters report said. In this context I want to point readers to this marketwatch story on consumer's attitude to car buying.
Stocks and bonds have continued their seesaw trend in view of the mass of data, though one could not say that they were not clear enough. At the end of the day the market will have proven again that it is always right. The Dow is set for the biggest monthly decline in three years. The US dollar took some strength from the weak economic indicators. How long will the argument hold that a fundamentally weak currency will become more "attractive" by higher interest rates when inflation will bring the result that the greenback buys less of the same than a year ago. Sorry, common sense should make everybody shiver in view of this theory. Hypothetical question: Would you change your relatively hard currency against a bundle of Ghanaian Cedis just because they carry higher interest?
Market experts are now leaning a 100 percent on the side of another 25 basis points Fed funds rate hike on March 3. With inflationary pressures mounting the FOMC will have no other choice if they want to maintain their credibility in terms of keeping prices stable. But thinking about it all again right this moment, I think a 50 basis points hike could be a better answer. Sure, it would first turn out to be a shock, sending bonds and shares into a freefall for a day or so. On the other hand this would reinforce the belief that the Fed is serious about keeping the economy in positive territory as it would send a clear signal to the White House that the huge deficits will come at a cost in the end. The Fed has to move fast to get interest rates back into the neutral zone if they want to have some dry powder left, should the economy nosedive. And this cannot be ruled out anymore when one looks at the vanishing production capacities in the US. Looking at Japan one sees what happens to a country where all the interest-ammunition was used up prematurely. Japan sees no way out of stagflation for the next two years.
Great economies, like Germany before it began outsourcing its jobs in order to keep pension fund managers and their religious belief in shareholder value theories, have always had a base in the production sector. Now Germany groans under an unemployment rate of 12 percent. I cannot remember whose quote it is, but is still valid, "we cannot live from serving hamburgers to each other."
Looking into European store shelves, there are not many American products on sale. US cars are considered gas-inefficient monsters with terrible roadhandling. Whirlpool appliances are considered a luxury when Italian Zanussi dishwashers break down far less often. And the Apple Powerbook I am writing my posts on states on the backside "designed in California, produced in Taiwan".


Wikinvest Wire