2011 June – The Newsletter is Back!

On June 6th, 2011, posted in: Economic News, Newsletter by

ABOUT THE ECONOMY

It has been awhile since I was able to do any research to write a newsletter. This was due to my MDRT commitments (around the world 8 times in 18 months) and a conflict I had to resolve with our old broker dealer. Fortunately we have worked through those problems. Sorry if you missed them, but we are back on track.

Looking back over the last couple of weeks, we can see how really fragile the US economy seems to be. After the 2000-2003 bubble, the economy bounced back quickly and the unemployed were able to get back to work rather quickly. But with unemployment hanging around 9% and only 54,000 non-farm family jobs were created, one has to wonder what is going to jump start our job market. It also looks like stats for the two previous months will need to be adjusted downward by 39,000 fewer jobs.

We can blame the weather, holidays and taxes for the malaise, I guess.  But opinions, explanations and rationales by analysts, economists, and politicians include supply-chain problems in Japan, cost of regulation and high gas prices.  Congress does not seem willing to tackle the questions of how we can shed 500,000 jobs in one week, with an economy that is barely growing and expect the market to be robust.

There are two statistics which are good indicators of productivity and economic activity. The first is non-farm productivity. This is measures how efficiently workers are turning out goods and services per hour worked.  The second measure is a “unit” of labor costs. ULC is what employers pay workers.

First Quarter 2011 saw productivity (+1.8%) increase faster than  ULC (which rose +0.7%). As a comparison, productivity only was 1.3% in 2010. This should reduce inflationary pressure.  With so much talk about the possibility of inflation, this ratio is good news. However, the Fed policies are aimed at making sure we don’t have deflation. This is their biggest concern right now.

When productivity is higher than labor costs, employers hire fewer employees. There is no incentive to hire more workers to reduce labor costs per output. This may mean  a weaker job market and higher unemployment for some time to come.  However, as companies are able to find ways to be more efficient while still demanding more hours from each employee, these gains in productivity could generate pay increases and make it necessary for companies to hire more workers going forward. Some economists expect private sector hiring to remain strong in 2011. So, who knows?

New unemployment insurance claims fell 6,000 last week to 422,000. Continuing claims for regular state benefits declined 1,000 to 3.71 million.

Cars and light trucks sold at an 11.8 million annual rate in May, down 10.5% from April but still up 1.3% versus a year ago.  The Japan disaster has hurt the auto sector the most.  Car inventories have plummeted and manufacturers and dealers have responded by drastically reducing incentives.  This will reverse over the next few months as auto production rebounds.

ABOUT THE MARKETS

The markets continued to decline as we head towards June 30 and  the end of 2Q. This was the fifth consecutive week of losses after an optimistic start in 1Q.  The Dow [-2.33%; +4.96%], the S & P 500 [-2.32%; +3.38%] and the NASDAQ Composite [-2.29%; +3.01%] all fell.  What were double-digit gains a month or so ago are edging nearer to break even for the first half of the year. Past performance is no guarantee of future results. Indexes are not available for direct investment.

I think the market is responding to the jobs report, higher unemployment and a continuing decline in consumer confidence.  Sprinkle in the standoff  going on it DC over the debt limit, spending cuts, and the potential default on U. S. debt and you have nothing encouraging for the markets to exploit.

One might also ask what will happen when the Fed ends QE2, the bond-buying spree this month.  Wasn’t it just recently the media was fanning the fears interest rates would surge when the Fed stopped buying? Now, we see Treasury rates are falling as buyers begin pricing in their concern about a “double-dip recession” and a “soft patch.”

Recent stock prices have pegged the S & P 500 P/E ratios between 15-16 range. This is close to their historical average.  Coupled with over $3 trillion of uninvested funds, it shows most investors are waiting until the politicians  make up their mind.

This last month saw the U. S. dollar continue to weaken against the Euro (€), down more than three cents at week’s end. A lower dollar adversely affects the price of oil, sending it above $100 per barrel.  There is no reason to think this is going to change. And even though consumers saw a drop in gasoline prices with the national average for unleaded dipping to $3.79 last week after peaking above $4.00 a gallon just a few weeks ago, look for prices to rise now that the summer driving season is upon us.

Looking ahead: The market is way too skittish to be bullish any time soon. With all the uncertainty, I am guessing the market will end 2011 under 10% unless the government pulls a rabbit out of the hat on the national debt and budget deficits.

ABOUT YOUR PERSONAL FINANCES

The Europizing  of America – Progressives have long wanted America to be more like the Europe they fantasize and long for. During the 1990s, America created some 20+ million new, private sector jobs;during that same time in Europe, none. Now, the U. S. unemployment rate is hovering around  nine percent PLUS, which is about the European average.  Our debt to GDP ratio is approaching 100%, which puts us just a bit better off than Italy (116.7%), but higher than Portugal (84.6%) and Ireland (82.9%).  The latter two countries were bailed out by the European Central Bank (ECB) and the International Monetary Fund (IMF).

The new US job report showed 54,000 new non-farm jobs created last month. But it is estimated we need about 100,000 -150,000  jobs to keep up with our population growth. Only 3,000 of those 54,000 jobs, were “goods producing.” “Goods Producing” jobs are manufacturing jobs, which usually have higher salaries and better benefits than service sector jobs. According to recent reports, 30,000 of the jobs created were the result of MacDonald’s hiring. Public sector jobs fell in the US by only 29,000 in May, mostly in education.

Do we have to wonder why so much of world’s financial and intellectual capital is moving to nations like China and India? China and India have about forty percent of the world’s population.  Their job growth rates are mirrors what ours were in the fifties and sixties. As baby boomers retire, who will do their jobs? Alan Greenspan, former Chairman of the Federal Reserve, expressed his concern that younger Americans often have not done as well in matching the education and job skills of foreigners. We reap what we sow.

LOOKING FOR FACTS?

Try www.usa.gov – virtually everything you might want to know about the US government statistics are listed here.

In 2011, the maximum annual 401(k) contribution is up to $16,500. This number does NOT include any employer-matching contributions.  Catch-up contributions for those over 50 years old can be as much as $5,500.

If you would like us to review your 401(k) allocation, send us your statement and fill out a risk analysis questionnaire. We would be glad to offer our suggested allocation for your plan.

 

This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.

 

 

 

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