By Bill Bartok, Stanford Mortgage Advisor
The reader’s digest version is how do we survive without the Fed’s “crack” feeding the Markets. This will not end pretty. The markets (stock and bond) are trading in reverse. That is, they are moving higher on negative economic news because that means the Fed will continue buying bonds and stimulating the economy. They should be moving higher on good news. Strong economic growth should be good for stocks because they earn a higher return. The current pattern suggests that when (not if) the Fed returns to normalcy, the stock market will correct. And it won’t be pretty.
The Federal Government posted a budget deficit of $97.6 billion in July, a rise from the same month ago, though a rise in tax receipts may make the annual budget gap the smallest in five years. In July, the government spent $297.6 billion and took in $200 billion in revenue. Including the July deficit, the budget gap for the first ten months of the 2013 fiscal year totaled $607.4 billion, down 38% from the same period a year ago. Question; is this supposed to be good news?
Small-business “optimism” pretty much remained the same in July, helped by slight gains in the percentage of those planning to increase employment, those saying now’s a good time to expand and those expecting real sales to be higher. The National Federation of Independent Business said its small-business optimism index rose 0.6 points to 94.1, still half a point below the Dec. 2007 reading, when the U.S. entered recession. The report is based on the responses of 1,615 randomly sampled small businesses in NFIB’s membership. I don’t know if there’s a “pessimism” index, but I show this because small business I think is a big component in the direction of growth.
Retail sales rose a sluggish 0.2% for the fourth straight month in July, and details of the report suggest some firming in consumer spending. But most of the weakness was due to a steep drop in automobile sales after strong gains in May and June. Excluding that category, retail sales rose 0.5%. Consumer spending drives about two-thirds of demand in the U.S. economy.
Prices (inflation) at the wholesale level were unchanged in July, as prices declined for energy, didn’t change for food, and rose for pharmaceuticals. Meanwhile, the core producer-price index, which excludes food and energy, increased 0.1%. The report signals that inflation was contained in July. Weak international conditions have been pressuring prices.
Consumer prices rose 0.2% on gains for gasoline, housing, clothing and food, among other goods. Excluding energy and food, the “core” consumer-price index also rose 0.2%. Consumer prices have increased 2% over the past 12 months, and the core has increased 1.7%. While most traders (the Market) expect that the Fed could announce plans to taper its massive bond-buying program as early as September, there’s been some concern about inflation running too low. Also, the government reported that inflation-adjusted average hourly earnings fell 0.2% in July. Real wages have declined 0.1% over the past 12 months.
On the employment front: Signaling a slower pace of layoffs, the number of people who applied for new jobless benefits fell 15,000 to 320,000 last week, hitting the lowest level of initial claims since October 2007. Continuing claims dropped 54,000 to a seasonally adjusted 2.97 million in the week that ended Aug. 3. Continuing claims reflect the number of people already receiving benefits.
Home-builder confidence rose in August to the highest level in nearly eight years, on gains in both current sales conditions and prospective ones. The National Association of Home Builders/Wells Fargo housing market index rose 3 points to 59, marking the fourth rise in a row. Any reading above 50 is considered “good.” The component measuring current sales conditions rose 3 points to 62, the component measuring sales expectations in the next six months rose a point to 68, and the component measuring traffic of prospective buyers was unchanged at 45.
Consumer sentiment took a step back in August from post-recession highs after some leading retailers reported cautious spending by shoppers. The preliminary August reading of the University of Michigan/Thomson Reuters consumer sentiment fell to a reading of 80.0 in August, down from 85.1 in July. The outlook component fell to 72.9 in August from 76.5 in July, while current conditions dropped to 91.0 in August from 98.6 in July. These levels are still quite weak on a historical basis even with the post-recession gains.
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