US economic data continued its slow decline, dragged down by a lack of central bank stimulus, weak export markets, sagging confidence, and continued uncertainty about the regulatory environment. Its been more than a half decade since the housing market swooned and almost exactly a half decade since Bear Stearns began its precipitous fall off the map, yet the news from Washington (or lack of news) and the corresponding leadership gap is beginning to drive us towards a second recession. I've discussed a second recession coming in 2013 for the past 22 months; we are less than six months from that formidable date and it appears the recession will be here right on cue.
Why haven't we repaired our economy since the last recession? Blame our political leadership. They have leaned on and relied upon the Fed to do their jobs for them since the crisis began. The Fed, while all its failings and inability to see the magnitude of the tidal wave coming has been well-documented, has been the sole contributor to keeping this house of cards going. Politicians have sat on their hands, except when they've had them outstretched to collect campaign contributions or bribes, the entire time. Of course, I don't want to be completely ignorant of the contributions of DC. I almost neglected to remind you that they did manage to pass an entirely new entitlement program in spite of the fact that two of the three existing entitlement programs are already underfunded and driving the country into a European type abyss. I guess that makes sense when the President openly admires European style government and waxes on about his desire to make the US more like Europe. While he hasn't done much while in office, he can take credit for driving the US to look more like Europe: high unemployment, stagnant economy, huge social programs, and soaring debt. As my father used to say "be careful what you wish for, you may actually get it."
Job growth came in at a disappointing 80K last week, well below consensus. Manufacturing employment, which has been a bright spot due to export demand, has flattened. Housing, in select markets, continues to show a firming trend as mortgage rates have fallen to record lows, with 30 year fixed trading at 3.62%. The rub in the housing market, of course, remains the high number of owners who are underwater on their mortgages. The other issue is the banks, which are proving to be quite difficult when it comes to refinancing activity. The purchasing manager's index came in under 50, which suggests a contraction. As Operation Twist ends and the effects of the late 2011 LTRO wear off, we're left with a moribund economy in the US and weak or declining growth in almost every significant global economy.
Policy makers continue to be concerned as evidenced by rate cuts in Europe, China, and the UK last week. The Fed would love to join the party, however, two things are holding them back. The first is the upcoming elections, which will force the Fed to wait until the economy is really bad before acting lest they be charged with aiding the incumbent. The second is the upcoming Jackson Hole summit, where Chairman Bernanke has been known to pre-announce policy changes. It has been rumored that the good chairman now has a stake in the Wyoming enclave, so is waiting to make any announcements there so as to ensure a large gathering of hotel room renting journalists.
Consumers are certainly reacting to the slowdown in the economy, as evidenced by June's retail sales comps, which came in at 0.1% vs. expectations of 0.5%. Retailers have been expressing concerns about a weak back to school season, one of the most important on the retailing calendar.
Here's a shocker: California actually passed a budget on time. Of course, the whole budget is a complete sham as it relies on a theoretical $9 billion to be raised in new taxes to be voted upon in November. Should the measure fail, the budget will need to be restructured or services in the state will be cut. In an effort to increase voter angst and, let's be honest, to blackmail voters, Governor Brown has vowed to take the cuts from the school districts first as opposed to less popular programs.
Speaking of California, Sacramento officials voted to proceed with a high speed rail system estimated to cost $64 billion (although some independent estimates peg the number as high as $250 billion) in spite of the state's fiscal status, which is pitiful. Additionally, the federal government has pulled its pledge to help fund the project. Studies have shown that once the system is built, there will be almost zero chance for it to be self-funding, which means the system will be nothing more than a taxpayer funded novelty ride. If I were the people at Disneyland or Knott's, I'd be lobbying against this type of government sponsored competition for entertainment dollars. The first scheduled stations will be the hotspots of the central valley, the smallest population centers on the route.
OK, I guess today's note was a bit more acerbic than usual. I'm not sure why-I'm writing from my laptop next to the pool, enjoying the light sea breeze and 72 degree weather. Maybe its because football season is around the corner, and I really can't wait for it to get here.
I hope you are well. Have a great day