On Deteriorating Economic Reports and QE2’s Home Stretch

On Deteriorating Economic Reports and QE2’s Home Stretch

When 2011 dawned, it was widely believed that the stock market would be OK, and likely continue to rise for the first half of the year, as economic reports were expected to continue to improve.

And lo and behold, the financial crowd was right on the money!  But now that the first quarter is behind us, and the end of QE2 is (at least supposedly) around the corner, is this roaring campfire of a good time about to get broken up?

I was just reading through our boy Sy Harding’s latest Street Smart Report – Sy addressed this in his newsletter, and was gracious enough to allow us to reprint an excerpt of this section here…


The following is excerpted from Sy Harding‘s newest Street Smart Report.

Economic reports are also deteriorating

Economic reports had been almost universally improving since last fall, indicating the economic recovery was back on track after its scary relapse last spring.

But the latest reports are not so encouraging.

GDP growth for the 4th quarter of last year was revised down to only 2.8% from the previously reported 3.2%, and forecasts that it would be revised up to 3.3%.

It was reported last week that the U.S. trade deficit surged up 15% in January, a negative for the economy. And that new housing starts plunged 22.5% in February, while building permits for future starts plunged 8.2% to only 517,000, the lowest level of permits for future
construction ever recorded.

This week it was reported that existing home sales fell 9.6% in February, much worse than expectations, while existing home prices are down 5.2% from a year ago, to the lowest level in 9 years, and the inventory of unsold existing homes increased by 3.5%.

This morning it was reported that new home sales fell a huge 16.9% in Feb., the 3rd straight monthly decline, to a record low in records that go back almost 50 years.

Yesterday it was reported that the University of Michigan’s Consumer Confidence Index fell sharply, to 68.2 in March, its lowest level since last October. And the sub-index of expectations for the future plunged
from 71.6 to 58.3. Not a good sign for important consumer spending going forward.


Consider that these deteriorating reports are taking place while the Fed’s additional stimulus efforts (QE2) are still in full force and effect. If QE2 was not able to keep the growth going what can the Fed do next?

One clear result of the extra QE2 stimulus has been to drive extra dollars into stock markets and commodities, raising global inflation, which in turn has had countries around the world raising interest rates to ward off the inflation, negative for their economies.

The Fed has said it can’t worry about other countries, that it’s concern is the U.S. economy, and it believes it can continue with its easy monetary policies, as it sees no evidence of rising inflation in the U.S.

The Fed no sooner made that statement after its FOMC meeting last week when the latest Producer Price Index was released. It showed inflation at the producer level spiked up 1.6% in February. It was the largest monthly increase since 1974, when the runaway inflation spiral of the 1970’s was underway.

With the exception of Consumer Confidence, those reports were for the month or two prior to the devastating earthquake and tsunami in Japan.

So now the probable effects of that disaster must be added, and while it’s still too early to tell the extent of the impact, we can know that it will be negative, not positive.

Keep in mind that the two main driving forces of the U.S. economy (in both directions) have always been the housing and auto industries, and we’ve seen what is happening to housing so far this year.

Now let’s look at autos which have been a bright spot.

Most of Japan’s auto industry remains shut down, not just its own assembly plants, but hundreds of smaller factories producing auto-parts for auto makers around the world. As a result of parts shortages, production in several plants in the U.S. and Europe have been curtailed and apparently for an unknown period of time.

Meanwhile, major Japanese electronics suppliers, including Sony, Canon, Toshiba, and Panasonic, have some of their plants shut down due to damage, and others operating at reduced levels due to parts shortages.

The earthquake and tsunami have halted 25% of silicon wafer production, which experts say will have an impact on the global supply of memory chips.

So is it reasonable to believe this is a buying opportunity? Or is it more likely worsening conditions, and deteriorating economic and earnings prospects, indicating markets have unfinished business on the downside?

Source: Sy Harding’s Street Smart Report