Story Continues: No Bright Light Marking the End of Sub-Par Growth

Daily Forex Fundamentals | Written by Wachovia Corporation | Sep 23 08 06:31 GMT |

Following up on our mid-year report, benchmark indicators do not suggest an early end to the sub-par growth experience in the U.S. The housing/credit market correction continues to roll ahead with implications for jobs, production and monetary policy. There is no easy-out for financial markets with the Fed likely to remain on hold. Jobless Claims: Weekly Reminder of a Sub-Par Job Market and Economy As illustrated in the top graph, initial jobless claims have jumped above their trend thereby suggesting continued weakness in the labor market. Such movements in the past have been associated with recessions (1990-1991, 2001) or periods of significant slowdown (1995). Rising jobless claims in recent months have been consistent with declines in the overall non-farm payroll series. In recent months we have seen job declines in manufacturing, construction and many service sectors. Employment declines lead to weak personal income growth and thereby slower consumer spending. For the second half of this year we estimate consumer spending will decline compared to a gain of three percent during 2006 and 2007. Production: Downshift Clearly Evident Industrial production, as illustrated in the middle graph, has dipped in recent months in a manner similar to the pattern of prior recessions. Over the last three months, manufacturing output has declined 1.6 percent with declines in consumer goods, business equipment, chemicals and non-energy materials. Motor vehicle production has also been very weak. This downshift is consistent with the decline in capital goods orders and recent weakness in measures of business sentiment like the Institute for Supply Management's manufacturing survey. Looking forward we do not expect an upswing for industrial production until the fourth quarter of this year. Higher energy costs have clearly raised the cost of doing business for utilities and manufacturers. With a profit squeeze underway there is less incentive to produce. Four Growth Benchmarks: Clearly Below Trend When we review the four growth benchmarks we find that they deviate on the downside relative to their composite trend (bottom graph). These four include manufacturing & trade sales, real personal income, industrial production and employment. In recent months, all four have fallen below their trend growth rates, thereby suggesting downside risk for the economy as well. Our outlook is for below trend growth, but with persistent inflationary pressures in the short run. We do expect the core deflator inflation benchmark to be reached early next year. This suggests no move by the Federal Reserve to lower the funds rate at the October meeting but with some possible easing in December or early next year. We continue to expect that pre-tax corporate profits will decline during the second half of this year. Both financial and non-financial profits will be under pressure. Wachovia Corporation http://www.wachovia.com Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.