Posted by Shyam Moondra
Economy seems to have stalled. Look at the following trends:
· While the number of new weekly unemployment claims is going down, it is still very high (in the 600,000-range) and the total number of people receiving unemployment benefits continues to rise, currently standing at little under 7 millions. It's now almost certain that the unemployment rate will exceed 10% and may even go over 11%.
· While the latest retail sales data for May shows an increase of 0.5%, that increase reflects a burst of auto demand generated by the tremendous bargains being offered by the auto dealers many of whom are going out of business and are in the process of liquidating their inventory (but these bargains can't be sustained indefinitely) and higher gasoline prices (consumers are buying the same amount of gasoline but paying more). Therefore, the consumer demand is not quite as robust as the retail sales data might suggest.
· In recent weeks, the prices of oil and other commodities have increased substantially, raising the specter of inflationary expectations. These price increases are being driven not by any demand-supply imbalances but because of speculative purchases by investors. Oil and gasoline prices are now double of what they were a few weeks ago, crimping consumer spending.
· Interest rates have started to increase with the 30-year fixed mortgage rate now almost 25% higher than what it was a few weeks ago. Higher interest rates have already stalled the mortgage refinance activity. The number of foreclosures continues to be at near record levels and as the interest rates rise even more, this number will only get worse. All of these trends will have a negative impact on the home sales and home prices in the coming weeks and months. Recent stress tests conducted by the Department of Treasury may require financial institutions to raise additional capital in the future, thereby slowing the financial market's recovery.
· Dollar is plummeting, diminishing its role as the world's reserve currency. The creditor countries such as China may be reluctant to invest in the U.S. securities at the same level as they used to, driving up the interest rates even more which will delay the economic recovery. While a weak dollar may stimulate exports, it will also lead to higher import prices which will aggravate the inflation problem.
· The trade and budget deficits are increasing which means weaker dollar, higher oil and commodity prices, and higher interest rates down the road.
The Obama administration has been too slow in spending the stimulus money. Congress has been too slow in finalizing the regulatory regime for the twenty-first century. Deteriorating economy combined with speculative trading by investment banks and hedge funds could trigger an economic crash. President Obama has been spending too much time on overseas trips and his absence has hurt the economy. In the beginning he was a hands-on president, but lately his execution on economic matters has been sub-par. Obama and Congress need to come up with a new plan, perhaps another stimulus package, or else we are likely to have a relapse of an economic slowdown.
