A. A SEASON OF CHANGE
Fall always brings a notable change. New teachers and possibly different schools for the children, brigning out different clothes for colder climates, the beginning of some sport seasons and the conclusion of others... Now less than two months away, we'll soon have national elections that may significantly change the representation in Congress and possibly the Oval office. The duldrum of equity markets and the high price of oil could begin to change, hopefully for the better. Iran will become much more of an issue after the coming elections, as some action may become more eminent due to its nuclear threat. Though the fear of terrorist activity subsided with the a successful Olympics and Republican Convention, there still appears to be major concerns that a catostrophic event that will occur before the November elections. This partly explains the recent rise in bond prices rise while stocks have been stuck in the dog house.
Possibly the biggest change that should be more evident in the next few months is the direction of the economy. This past week the Federal Reserve raised the discount rate for the third time since the beginning of the summer another quarter point to 1.75%. The Fed cites its continued concern over inflation and optimism about an economic rebound. Interestingly, actions in the bond market seem to refute this view. With rising prices in the bond market, causing intermediate and long terms rates to decrease even though short term rates are increasing, it seems that more investors are believing that the Feds will need to back off from their increasing short term rates soon. Quite simply, this is because more investors believe inflation and job growth are not materializing. This is resulting in lower mortgage rates, which is good new for real estate. Though recent sales
What we expected to be a lackluster summer, with some good and bad news, has turned decidedly negative. Oil prices, which declined near the beginning of the summer, have now surged about 20% and have topped $45 barrel, with expectations at $50 per barrel. Though Saudi Arabia has pledged to increase production, tight inventories, a triple threat in Iraq, Russia and Venezuela that could jeopardize supplies - along with increased speculation by hedge funds - have combined to make oil much more expensive. This is having a ripple affect upon the economy by increasing costs for corporations, making them less willing to hire and expand, and constraining consumer expenditures, which have been the major source of the recovery. With corporate earnings in the second quarter off from the first quarter, and more indications of caution with future earnings, the stock market has been weak. Declining job growth strength, after four consecutive monthly declines, is becoming most apparent after the most recent gain of only 34,000 jobs in July versus expectations of 225,000 jobs. Revised GDP growth for the second quarter is now down from over 4% to about 3%. At the same time the trade deficit gap widened by 19% last month as exports dropped, largely due to what is considered slowing global demand.
Though negatives abound, the Federal Reserve was undaunted as they increased the federal discount rate for the second time in a row earlier this month by a quarter of a point to 1.5%. This has caused the prime rates posted by most banks to move up to 4.5% from 4% only a couple months ago. It appears that Chairman Alan Greenspan views the negative turns this summer as a lull. There also appears to be a widening discrepancy in job growth between the declining growth indicated by payroll figures versus robust job formation indicated by estimates used from households. Job growth based on payrolls is more widely accepted as it is based on a sample size of around 400,000, whereas the household estimate, more reflective of independent contractors and small business formations, is only about 60,000. Consequently, there is a belief that the economy may be growing from individuals and small start-up firms instead of from large corporations. Even though consumer core price increases are providing good news by remaining low and less than expected, the Federal Reserve is fearful of inflation and may also want to avoid the perception that there could be serious problems with an economic recovery. There has also been a slight slip in consumer sentiment recently, and with the November election getting closer and with much more criticism of each candidate by the other, it may cause less optimism about the immediate prospects of both our economy and country. Top
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