State of the Economy – May 2010 – Part 2

The global situation is changing rapidly and for the first time I though of writing two updates in a single month. In the US market indicators are showing positive growth, but just today the administration’s economic advisor commented that more stimulus is needed to combat unemployment. This is something I’ve been writing about since almost the start of the down cycle. I personally do not see how stimulus can be used to stem structural unemployment in the rust belt, but well targeted funds would have a positive impact in states that are already on a positive trend curve.

The total monthly supply of houses is up from last year, as the tax refunds are over and new construction was started before the market was able to absorb. The first quarter saw a jump in foreclosures across the nation feeding into the pool of available houses and impacting home values. I believe it is imperative that the administration continues tax cuts for home buyers to stimulate home sales. Getting home value back up to pre 2009 levels should be the main goal of the administration.

Europe is well on its way to a double dip scenario, as was predicted last year. The euro is approaching 1.2 against the dollar, which is great for European exports, but a sign of the general weakness of the euro zone. I believe that there is a strong risk that the recent 1 trillion fund will not be enough and that political will to put more money in to the fund will be limited. The austerity measures are having a strong dampening effect on Southern European economies and will impact overall euro zone growth. Most European companies already shed excess personnel, so I do not expect to see massive layoffs, but the overall weakness in the economy will impact wallets.

Stagnation or a dip in Europe will impact China growth, which will have yet unforeseen effects.

Retail sales growth was only 0.4% in April-May of this year. This was 0.2% higher than expected, but the showed that consumer spending growth has almost stagnated. I think this is indicative of the overall feeling the in the market. People are holding their breath for now. I would predict that we will see another growth spurt in the fall, as schools start again. Whether that spurt will meet expectations or not will remain to be seen.

GDP growth is predicted to hit 4.2%, growth from the current 3.2%. I highly doubt it without massive stimulus spending. I am happy with a 3.2% rate, which is a healthy number, but not really a growth number.

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