Klein's Commentary

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Mid-Day Note: Global Economic Data Disappoints

U.S. economy still lags.

Today’s U.S. housing and consumer confidence figures failed to signal a real economic rebound. This after Moody’s downgrades of fifteen banks last week, including Goldman Sachs, and earlier Federal Reserve data* showing U.S. household net wealth plunging over 40 percent between 2007-2010. That’s an entire generation of wealth creation gone in three years. On a slightly positive note net wealth has been growing slowly since then, but for whom? Mainly shareholders and executives. Corporations continue to sit on cash ($1.7 trillion give or take) while the middle class, hit hardest by the downturn remains worst positioned to recover.

The temperature continues rising on a host of ills begging for resolution (jobs, insurance, income gaps), but as election season shifts into full gear expect more political paralysis in Washington, not less. Still, some growth, any growth, is better than contraction even at a paltry 1.8%. Lower gas prices may pump a few extra dollars into pockets over the next few months. Major concerns of course remain. Where will growth emerge if consumers continue to face pressure from all sides – stubbornly high unemployment, marginal home price increases, expiring tax breaks and soaring healthcare costs. Expect a long, hot summer.

Europe – Cyprus and Spain join the bailout line.

Moody’s downgraded Spanish banks in a widely recognized crisis of financial confidence. Now one of Europe’s larger economies officially joins the bailout que. Add Cyprus’s estimated 5-10 billion euros, a pittance compared to Greece, and Europe’s southern rim continues unravelling. Brussels won’t yield money without constraints. The only question left, at what cost in the short term versus broader integration later. The focus needs to remain firmly on the moment as the European Union will need plenty of time to hash out new monetary rules among its 17 member countries and 23 official languages.

Japan – Nuclear power returns but jobs may not.

Nuclear plants are coming back online absent energy alternatives (including a fragmented electrical grid and untapped geothermal resources). That will at least avoid production shutdowns that hobbled 2011 electronics and automotive manufacturing. Tepid recovery following last year’s disaster remains on track, but a track to where? Longer trends still point downward. Major manufacturers are off-shoring in droves, responding to light domestic demand, a troublesome exchange rate (making exports exceptionally expensive for overseas buyers), and greater growth prospects elsewhere. With all three of the world’s traditional growth engines stalled or sputtering, sources of new growth remain a mystery.

China – Slower growth than expected.

Serious headwinds continue to mount in China’s struggle to maintain history-defying growth. HSBC’s June flash purchasing manufacturer’s index fell to 48.1, it’s eighth consecutive month of contraction staying below the critical 50 mark. Accurate statistics continue to be problem, but if electricity consumption and coal inventories are any gauge, especially in China’s southern production heartland, then a slowdown has been building for some time. Power generation is barely growing as it approaches early 2010 lows, and this time absent a major global economic shock like the U.S. financial crisis. Strains in Europe alone don’t account for this slowdown. Chinese stimulus efforts are expected to fall far below their previous $550+ billion injection during the leanest years (2008-2009). Officials know that only so much demand exists for infrastructure and construction projects, their preferred stimulus sectors of the past.

Bottom Line:

Tepid U.S. recovery continues but rising risks suggest more slowing ahead. Europe’s ills are the near term weight, but China has a long way to go towards structural change and real consumer-driven demand. With their own power transition incomplete until the end of the year don’t expect dramatic upside surprises any time soon. If/when politicians on any continent finally resolve to get more money into the pockets of the middle class, then recovery prospects will finally brighten.

* For Federal Reserve household wealth data see:
htp://www.federalreserve.gov/releases/z1/current/z1r-5.pdf

Photo: Brian P. Klein

Brian • June 26, 2012


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