Tuesday, August 2, 2011

An economic snapshot

While we continue with book reviews, the last one is scheduled for August 12th, we will pause for a moment to take a snapshot of our current economy.
My main impetus was reading this morning’s Wall Street Journal.  All of these reports, except one from this Saturday, come from today's paper.
These are snapshots, not the last word, but they are not encouraging.  The two final articles note the problems with the overhang of debt, and increases in fuel prices.  That fuel prices are staying strong with this type of economic activity is highly problematic.  I don’t discount the issue of price manipulation in these markets, but it highlights the fragility of our current situation.
Europe's Youth Face Scarcity of Jobs:  The 20.3% Unemployment Rate Is Expected to Grow as Austerity Bites, Portending Social Problems
Riva Froymovich, Wall Street Journal, 2 August 2011
The high rates of youth unemployment that fed protests from Spain across the euro zone this year are likely to worsen before they improve, new data released Monday suggest, given the region's debt crisis and budget cutbacks.
"Youth unemployment is going to reach record highs," said Alessandro Turrini, head of the labor-market reforms unit in the European Commission economics directorate.
Under normal circumstances, governments would try to cushion high joblessness with more spending to boost employment. But that has been all but ruled out by governments that are under pressure from financial markets to reduce spending and deliver on deficit targets.

Alex Brittain and Paul Hannon, Wall Street Journal, 2 August 2011
LONDON—Activity at euro-zone factories slowed to a near standstill in July, suggesting the region's economy made a poor start to the third quarter, while official data showed more people lost their job in June.
The Markit final euro-zone manufacturing purchasing managers' index, a gauge of activity based on a survey of about 3,000 firms, fell to 50.4 in July from 52 in June, its lowest level in almost two years.

Conor Dougherty, Wall Street Journal 2 August 2011
The U.S. manufacturing sector barely expanded in July, a sign that a onetime driver of the economy is waning along with the recovery. The news echoes other reports which show that after a long cycle of rebuilding inventories, factories here and overseas are curtailing production amid softer demand.
"It's definitely not a good start," said Brad Holcomb, chairman of the ISM manufacturing report.
"We shouldn't be at a point in the recovery where you're getting a big pullback in the pipeline of activity," said David Greenlaw, an economist with Morgan Stanley. He added that the report raises questions about many economists' forecasts—including his own—that growth will pick up in the second half.

Jon Hilsner and Sara Murray, Wall Street Journal, 30 July 2011.
The government on Friday reported that the economy grew at a rate of just 1.3% in the second quarter, failing to bounce back from knocks earlier in the year. Estimates of first-quarter growth were also revised down to 0.4%. As a result, the pace of economic recovery has been one of the worst since World War II, weaker than all but the short-lived recovery of the early 1980s. That's particularly bad news as the economy confronts the threat of a default on the nation's debt.
"We were anticipating that 2011 was going to be a fairly decent year," says Robert Olson, chairman of Winnebago Industries, the recreational-vehicle maker. "We hit February and it really felt like people flicked a light switch." Now, Winnebago is holding off on parts and equipment orders to work down a $33 million buildup in inventories.
Debt is central to the fragility. The ability to borrow in bad times helped limit the economy's bumps in the 1990s and early 2000s. Karen Dynan, an economist at the Brookings Institution, a Washington think tank, says that, on average, a $100 short-term hit to incomes only pushed spending down by $5 during that stretch because consumers could borrow to smooth things out. Now, she says, they're stretched too thin to do that.
Robert Hall, a Stanford University professor, finds that three-quarters of households don't have two months worth of income socked away as cash or other liquid assets. Federal Reserve researcher Karen Pence finds that 41% of households can borrow less than $3,000 on their credit cards and 23% have been turned down or discouraged from applying for credit.

Andrew Peaple, Wall Street Journal, 2 August 2011.
So much for the International Energy Agency's intervention in oil markets. Less than six weeks ago, the association of leading oil-consuming countries released 60 million barrels of oil from strategic petroleum reserves to the market in an attempt to drive down prices. Yet Brent crude futures Monday hit more than $120 a barrel, nearly $6 above Brent prices just before the Paris-based IEA's move. Oil bears shouldn't rely on the IEA intervening again.

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