Market Update
Dwight Johnston
Vice President, Economic & Market Research
Searching high and low for good news…
Last month I wrote about some good news that was coming from some bad news. The fall in home prices has brought many areas back to affordability levels that make some sense again. This is turn will ultimately bring back buyers and stabilization in the housing market. This month I tried to find again some good news in the bad news, and it’s been a real struggle.
The most recent Unemployment Report was no worse than expected, and the markets responded positively to the news. But this is a false response. The numbers behind the numbers were ugly in every way. For the first half of 2008, the U.S. has lost 432,000 Nonfarm Payroll jobs. Some of the more esoteric data in the report suggested the stage has been set for accelerated job losses. The survey that determines the Unemployment Rate is showing further deterioration, and only an adjustment by the Bureau of Labor Statistics of the available worker pool is keeping the Unemployment Rate as low as it is being reported.
But the bad news doesn’t stop there. The financial sector, after enjoying a holiday in April and May, fell sharply again as losses are being taken on the balance sheets of regional and money center banks. Losses on securities have already been recognized, and now losses on portfolioed loans are being realized. The credit crunch will intensify not lessen.
Of course, the bad news focus has been on the price of oil. The price of crude has topped $145 a barrel, and there seems to be no end in sight. This is certainly a double-edged sword. It’s bad for inflation numbers, and that is what the Fed claims to be most concerned about now. But it’s worse for consumers. Confidence numbers are now at levels last seen in the early 1980s when inflation was the big problem. I’ve mentioned in past articles the problem is that the massive piling on of debt by consumers has left them little room to absorb the rising prices of food and energy. This has lead to a slowdown in the sales of all other consumer goods—especially cars. Businesses are also seeing profits squeezed because of rising input costs and no price flexibility. This is a classic recipe for recession.
I do think I’ve found some good news in the bad. With the stock market being so beaten down over the past month, a rally is likely. Expectations for earnings in the second quarter have been lowered to extremes. This means bad news will look like good news. We might enjoy another April-May-like rebound. It will likely fade as well, but we can enjoy it if and when it happens.
The other good news is that I was on a mostly local vacation over the past week, and I had no problem getting into popular hotels and restaurants. Also, traffic was amazingly light for Southern California. The stores I ventured into were wall-to-wall with discounted sale items. The good news here (other than it made my life easier) is that this means that consumers are taking action to rein in spending, cutting back on energy usage, and beginning the much-needed process of saving and repairing their balance sheets. The unanswerable question is how big of a hit the economy will take as this process plays out.
You can follow Dwight’s insightful commentary each business day on Member Center or www.wescorp.org.